sensitivity analysis

emma123

Did a search for this topic before I posted - found nothing - so I feel stupid for not understanding this topic fully. I'm distance learning so finding it a bit hard at the moment. I'm studying sensitivity analysis at the minute. Does anyone have the osborne book handy? lol if so it's page 90 + 91. I just don't get where they're getting the figures at the top of page 91 under the heading changes to receipts. Stared at the page past half hour getting nowhere

mge

Hi emma123. I took this unit fairly recently under the new QCF scheme. (I presume you are taking it under the old scheme, as my Osborne book doesn't tally up with your page numbers/description).

Sensitivity analysis asks the question 'what if' something changes from that which we've predicted.

So let's say we've worked out our cash budget for the next four months. We may then want to know how this cash budget would change if, for example, we altered our credit terms from two months credit to one month credit.

One way to do this would be to re-draft the entire cash budget. However, this could be very time-consuming.

A quicker way would be to examine the receipts from credit sales in isolation, and see how these change when credit terms change from two months to one month.

For example, our 'old' receipts from credit sales (under two month credit terms) could be:
Jan: £6,500
Feb: £4,500
Mar: £6,000
Apr: £7,000
(these are the figures taken from the original cash budget)

However, if with effect from January sales we change credit terms to 1 month credit, the new figures for credit sales will be (assuming sales of £8,000 in March):

Jan: £6,500 (the same as before, received for November sales)
Feb: £10,500 (£4,500 from December sales, £6,000 from January sales)
Mar: £7,000 (all from February sales)
Apr: £8,000 (all from March sales)

Now we subtract the 'old' receipts from the 'new' receipts to give the change in cash flow for each month:
Jan: £6,500 - £6,500 = 0
Feb: £10,500 - £4,500 = +£6,000
Mar: £7,000 - £6,000 = +£1,000
Apr: £8,000 - £7,000 = +£1,000

Next we add these figures to the original cash flow figures to get a revised cash flow figure for each month.

Now all we need to do is to redraft the bottom two lines of the cash budget using these revised cash flow figures ie. 'Bank balance bought forward' and 'Bank balance carried forward'.

emma123

Chees mge for replying. I sat for ages last nite after I posted my question. How sad am I studying on a sat nite the weeek b4 christmas! lol

I have to say though ur explanation is easier to understand than the book. Yeh my books under the old standards. Can't wait to get this unit wrapped up I hope it won't take long

mge

Best of luck with the unit emma Sounds as though you are very dedicated, so I'm sure you will do well!