What is the main use of sensitivity analysis in revenue forecasting?

Sensitivity analysis is primarily used to evaluate the impact of different variable changes on revenue forecasts. This technique allows financial planners to understand how changes in key assumptions—such as economic conditions, tax rates, or policy changes—can affect projected revenues. By adjusting these variables, analysts can see potential high and low revenue outcomes, helping them to gauge the risks associated with their revenue estimates.

For example, if a revenue forecast is based on assumptions about economic growth, sensitivity analysis can show how varying those growth rates impact the forecasted revenue. This is valuable for decision-makers, as it provides a range of possible outcomes and helps identify which variables have the most significant effect on revenue.

While assessing the reliability of income sources, identifying seasonal trends, and calculating average collection rates are important aspects of revenue forecasting, they do not specifically capture the essence of sensitivity analysis, which focuses on understanding the implications of changes in key variables on revenue predictions.