Using Sensitivity Analysis To Reveal Financial Blind Spots and Prepare for Best and Worst Case Scenarios
The range of potential business and economic outcomes in 2025 is … well, BIG.
New governments are taking power all across the globe. Geopolitical tensions in many parts of the world are running high. Economic news and outlooks remain mixed depending on which numbers you like and whose opinion you ask. And, with just a couple weeks into the New Year, fires and finger-pointing in California are reminding us that we have to be prepared for events that are beyond human control.
That’s why performing a sensitivity analysis needs to be at the top of every CEO’s 2025 annual planning agenda. By modeling multiple financial scenarios and outcomes, business leaders can identify blind spots, anticipate risks, and prepare their organizations to keep Making BIG Happen through the inevitable ups and downs of the year.
What is a sensitivity analysis?
A sensitivity analysis weighs how changes to specific variables impact a company’s overall performance. CEOs can also use this tool to transform the unknowns that could disrupt your business into additional, identifiable variables that you can analyze and adjust for, including:
- Revenue Vulnerabilities: Who are your chief competitors? How could various inflation and interest rate changes affect your customers’ spending habits? How could fluctuations in revenue in one territory affect marketing initiatives in another?
- Cost Pressures: How strong and diversified is your supply chain? How could rising or falling costs affect your inventory? How many “test bullets” can you afford to fire in Q1? Are you spending more than you need to in certain departments?
- Liquidity Risks: Top CEOs know that cash is king. Are you getting paid as quickly and efficiently as possible? Could loyalty programs or subscription pricing speed up your cash flow cycle? Is there dead money sitting in underperforming brick-and-mortar locations or legacy products that have lost their luster?
- Lack of Preparation: Are you ready to take advantage of a booming economy and BIG growth in your industry? Are you prepared to weather a recessionary storm and stay on course for profitability?
How to conduct a sensitivity analysis.
While it’s possible to use this modeling to test the viability of specific projects or changes to specific areas of your business, we’re encouraging our CEO coaching clients to perform a very high-level sensitivity analysis of their financial projections for 2025. Work through this process with your CFO, Chief AI Officer, and key department leaders such as your heads of sales and marketing:
Step 1: Identify key financial variables.
The KPIs that you regularly monitor on your company-wide dashboards should be the headline items here. But don’t underestimate how changes to any of your inputs or outputs could affect your long-term planning.
Items that should be on every company’s sensitivity analysis shortlist include:
- Tariffs
- Interest rates
- Currency exchange rates
- Revenue
- Operating costs
- Cash flow
- Insurance costs
Pay particular attention to the variables that your company has the least control over. You can always pull the plug on a marketing plan that doesn’t connect. But whether widespread tariffs do or don’t materialize this year, you need to have a plan.
Step 2: Create at least 3 models.
- Best-Case Scenario: Assume interest rates and inflation continue to drop, markets stay strong, and your company hits or exceeds its revenue targets.
- Worst-Case Scenario: The global economy slides into a recession, natural disasters disrupt the supply chain, your most reliable customers pull back on their spending, your shiny new SKU flops.
- Baseline Scenario: Current conditions inside and outside of your company hold steady.
If you have the resources, consider creating more nuanced sub-analyses within these three umbrellas. Under your worst case, a 5% revenue decline is going to game out very differently than a 10% decline.
Step 3: Analyze Results to Pinpoint Vulnerabilities and Opportunities
Which variable adjustments caused the most dramatic swings in your sensitivity analysis, for better or worse? These are the holes you need to fill in, and the advantages you need to capitalize on.
Turning analysis into action.
Even mediocre companies tend to leave their annual planning sessions with wind in their sails, targets on their BIG boards, and positivity coursing through every employee.
So why are these companies still mediocre six months later?
Because spending a couple of days analyzing models and setting inspiring goals is the easy part. What separates great companies from the rest is that they follow through with specific, measurable, manageable action.
For example, you probably knew before performing a sensitivity analysis that missing 5% of your revenue projections would make your Q1 goals, and therefore your annual goals, impossible. But seeing how tweaks to KPIs and other variables affect that picture should lead you to actionable insights, such as:
- Contingency plans for worst-case scenarios: How can you hedge, pivot, reorganize, or upgrade to keep your back from hitting the wall?
- Strategies to maximize potential growth opportunities: What new markets or customer niches should you target? Which competitor should you acquire? What seats should you add to your C-suite? How can your company be a leader in innovation or culture-building?
- Communication objectives: How can you keep all stakeholders aligned to the company’s BIG annual objectives?
Are you ready for 2025?
No matter what conclusions you draw from your financial sensitivity analysis, it’s likely that you’ll need to revisit this exercise throughout the year. It’s equally important that CEOs use sensitivity analysis learnings to build extra flexibility into their 2025 plans. Share what you learned about your company with your business forum, mentors, or your CEO coach to make sure you’ve examined your financial plan from every possible angle. Be open to alternate ways of solving challenges and leveraging strengths.
And don’t take anything about your business for granted. The further out you can imagine what could be around the corner this year, the better prepared you’ll be to Make BIG Happen, no matter what.
About CEO Coaching International
CEO Coaching International works with CEOs and their leadership teams to achieve extraordinary results quarter after quarter, year after year. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, the firm has coached more than 1,500+ CEOs and entrepreneurs across 100+ industries and 60 countries. Its coaches—former CEOs, presidents, and executives—have led businesses ranging from startups to over $10 billion, driving double-digit sales and profit growth, many culminating in eight, nine, or ten-figure exits.
Companies that have worked with CEO Coaching International for two years or more have achieved an average revenue CAGR of 31% (2.6X the U.S. average) and an average EBITDA CAGR of 52.3% (more than 5X the U.S. average).
Discover how coaching can transform your leadership journey at ceocoachinginternational.com.
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