What is the primary purpose of sensitivity analysis in business planning?

The primary purpose of sensitivity analysis in business planning is to generate several scenarios by entering different values for the assumptions. This analytical technique allows businesses to assess how changes in key variables can impact outcomes. By systematically altering the assumptions and observing the resulting variations in financial metrics or outcomes, decision-makers can identify which factors are most critical to their plans and understand how variations in these factors can affect overall business performance.

This approach provides valuable insights, enabling organizations to devise better strategies and make more informed decisions. It helps managers to gauge risks and prepare for various potential future states, thereby fostering proactive rather than reactive planning. Consequently, sensitivity analysis supports the adaptability of business plans in the face of uncertainty and helps in planning contingencies.

The other options do not represent the essence of sensitivity analysis. While preparing annual financial statements and establishing fixed budgets are essential components of business operations, they do not relate to the comparative and variable nature inherent in sensitivity analysis. Limiting the impact of unforeseen events may be an outcome of effective business planning, but it does not encapsulate the analytical focus of sensitivity analysis itself, which is primarily about exploring different potential scenarios based on variable inputs.