Sensitivity analysis

[@TheFinanceStoryteller]

Enjoyed this video? Then subscribe to the channel now, and watch my video on financial analysis next: kzbin.info/www/bejne/oHiQoIuuapmkrqc

[@tSp289]

Good explanation. Came here after coming across the terms in a building energy modeling context and decided I didn't want to just guess what it meant. Very useful! Thanks.

[@TheFinanceStoryteller]

Great to hear that! Thank you very much. I have made a follow-up video showing how to apply sensitivity analysis in Excel, that might be useful for you as well: kzbin.info/www/bejne/jWicYqqKmbmZmM0

[@tSp289]

@@TheFinanceStoryteller Cheers! Will check.

[@aliawinters]

Thank you for an easy explanation. I wish my lecturer was as good in explaining things, thank you!

[@TheFinanceStoryteller]

Glad it was helpful! Please spread the word to fellow students.

[@Matt-ik7dh]

you have carried me through applied corporate finance this semester

[@TheFinanceStoryteller]

Happy to help!!! Please spread the word to fellow students. 😊

[@DonCarlosHormozi]

Such great content, and such a wonderful South African accent! Keep it up! Love what you’re doing. See❤😎🙏🙏🙏

[@TheFinanceStoryteller]

Thank you very much for the kind words! You were very close with the guess.... it's a Dutch accent. :-)

[@adrianvaladez7816]

As a pharmacy student I don’t know why I’m here but my program thinks I need to know this haha thanks for the explanation anyway!

[@TheFinanceStoryteller]

Hi Adrian! I guess sensitivity analysis applies to finance as well as pharmacy! Thanks for watching and commenting.

[@michaelvalentine4129]

Hi, I’m a kid. Can you kindly explain to me what is the overall meaning of sensitivity that will make sense to me

[@TheFinanceStoryteller]

@@michaelvalentine4129 There are many different meanings of the word. My video explains sensitivity when it is used in the context of business. I am not sure that's what you are after.

[@animem2634]

+1 ✋🤣

[@pinard3684]

Your videos are fantastic. Thank you

[@TheFinanceStoryteller]

Thank you for the kind words, Pinar!

[@frankfei9130]

Thanks your explanation on sensitivity analysis, one sentence I am not sure what you mean by "try to detect the sensitivity of an outcome to different sized shocks" Does it mean "varying the input to different levels like 10% drop, 20% drop and 30% drop, and seeing how the target variables respond to each level of change?

[@TheFinanceStoryteller]

Yes, exactly! I would even add scenarios where the input drops by 40%, 50%, 60%, or more, and see what happens to the outcome. As I learned from Nassim Taleb "jumping ten times from a height of one meter might be a good sports exercise, jumping once from a height of ten meters less so".

[@juliefishmanoreon]

Great explanation! Thank you.

[@TheFinanceStoryteller]

Glad you enjoyed it!

[@KLushed_Up]

Thanks 🤓

[@surialeader4217]

Dear sir. We only can sensitise the revenue or can sensitise other elements I.e SGA or COGS. Regards from Malaysia

[@vedanthikale310]

5:32 Why is the variable cost same for both the cases? I didn't really understand

[@TheFinanceStoryteller]

Hi Vedanthi! The base case is the original P&L: 100K unit sold at $10 per unit, with a variable cost of $6 per unit. The two scenarios next to it are mutually exclusive. Either volume is dropped by 10% or price is dropped by 10%. Base case minus 10% volume leads to 90K units sold at $10 per unit, with a variable cost of $6 per unit, so $540K in variable cost. Base case minus 10% price leads to 100K units sold at $9 per unit, with a variable cost of $6 per unit, so $600K in variable cost. Therefore, the total variable cost $ of $600K is the same in the base case and the 10% price drop case.

[@kevineddlemon3049]

Very informative. Thank you

[@TheFinanceStoryteller]

Happy to help! Have a look at the related video on sensitivity analysis in Excel as well kzbin.info/www/bejne/jWicYqqKmbmZmM0 It might help to play around with the variables a bit to see the relationships.

[@yellowcyborg4729]

Thank you!

[@TheFinanceStoryteller]

Happy to help! Have a look at the related video on sensitivity analysis in Excel as well, that might be useful too: kzbin.info/www/bejne/jWicYqqKmbmZmM0

[@Mariokaz81]

Nice video, however I’d argue that it is not correct to say that a reduction in volumes is “better”, or “less worse”, than reduction in price. Perhaps for that specific financial year yes, but the causes of the reduction in sales volume should be deeply analyzed...they may be loss of market share, new entrants, change in customer behaviors, etc.. it would have been good to mention it, as new and inexperienced investors watching this video, may take your only assumption as good, and perform poorly. For a proper company evaluation the timeframe to keep in mind is always the long term and not “this year results”. Overall, I like the channel, thank you for the usual contents.

[@TheFinanceStoryteller]

Hello Mario! I agree with you that as a next step it is advisable to dive into possible causes for a volume decline or a price decline, and figure out as a company which actions to take to build a competitive advantage to avoid either of these. However, the purpose of a sensitivity analysis is to analyze possible effects of changes in input variables on a target variable, without necessarily knowing (or having to know, or caring to know) the reason why that would occur, but getting an understanding of the "payoff curve" if it does occur. Looking at the world from a phenomenological perspective! Some context: if you start off with 80% contribution margin in the base case rather than the 40% contribution margin in my example, then the effect on Operating Margin from a 10% price drop (versus a 10% volume drop) is not as bad. If you start with 20% or 30% contribution margin in the base case rather than the 40%, then a 10% price drop could evaporate your profit completely. A sensitivity analysis invites you to play around with those scenarios. I have worked in many industries where poorly skilled sales people thought that the best way to get new business was to provide price discounts (which cut heavily into the margin), started price wars to try to grab market share (with the sales people of competitors doing the same, as they had no better ideas on how to compete either), turned the products into commodities, and wrecked the company. Selling on price vs selling on value..... kzbin.info/www/bejne/aIGyaqd_qZpraZI

[@JorgeSanchez-tg3oh]

Mario, he was discussing sensitivity analysis in very general and basic terms, and in no uncertain terms, was telling inexperienced investors how to perform stock valuation. We should all be very happy that there is a "Finance Storyteller" channel. We have someone dedicated to teaching others what cost them lots of money and time. Comments like yours are unmerited. THANK YOU, FINANCE STORYTELLER!!!

[@austinnhernandezz6293]

@@JorgeSanchez-tg3oh I wouldn't say it's unmerited. It was a valid comment, and I think it's good thing for this community to ask questions and have conversations about the Financial storytellers videos. We all learn more this way, and makes the channel more lively.

[@ibeesa9]

I am studying actuarial studies and I stumbled across this video because I was just browsing on KZbin randomly. Do actuaries calculate / perform sensitivity analysis? I’d imagine you’d need someone with a strong mathematical background to create this model.

[@TheFinanceStoryteller]

Hello Ibrahim! I have no experience in the actuarial field, so cannot answer your question conclusively, but can imagine that sensitivity to mortality rates, interest rates, etc. could be important.

[@ibeesa9]

@@TheFinanceStoryteller thank you very much. If you don’t mind me asking, what is your educational background? Are you a CPA?

[@TheFinanceStoryteller]

@@ibeesa9 I have a Master of Science degree in Business Economics, then did the Financial Management Program at General Electric Company, and kept on educating myself while working in various finance and accounting roles. Check my Linked In profile if you want to learn more. For the past 15 years, I have teaching business acumen and finance-for-non-financial-managers courses at large corporations (some of which are mentioned as examples in my videos). So yeah, some educational foundation and then LOOOOOTTTTSSSS of self-study.

[@ibeesa9]

@@TheFinanceStoryteller Wow, did Finance turn into a passion for you? It’s not very often that someone starts with a Science degree and ends up working in financial services

[@TheFinanceStoryteller]

@@ibeesa9 Social sciences are not necessarily sciences, I learned over the years. ;-) Yes, I do look analyzing companies, and uncovering what they might prefer to stay hidden.

[@vikashbarnwal4840]

Hi

[@PasiganAlphaGraceJoyC.]

ha? paano naging $6 per unit yung sa variable cost amp iiyak nako neto sige

[@TheFinanceStoryteller]

Starting conditions of the example are selling price $10 per unit, variable cost $6 per unit.

[@0886-v4p]

Your tone of voice makes people lose concentration

[@TheFinanceStoryteller]

Then switch off the sound, and switch on the subtitles! 😎