Financial Planning Models and Sensitivity
Analysis
Financial planning models are mathematical representations of the relationships among
operating activities, financing activities, and other factors that affect the master budget.
Companies can use computer-based systems, such as Enterprise Resource Planning (ERP)
systems, to perform calculations for these planning models. Companies that use ERP systems,
and other such budgeting tools, find that these systems simplify budgeting and
reduce the computational burden and time required to prepare budgets. The Concepts in
Action box on page 198 provides an example of one such company. ERP systems store
vast quantities of information about the materials, machines and equipment, labor,
power, maintenance, and setups needed to manufacture different products. Once sales
quantities for different products have been identified, the software can quickly compute
the budgeted costs for manufacturing these products.
Software packages typically have a module on sensitivity analysis to assist managers
in their planning and budgeting activities. Sensitivity analysis is a “what-if” technique
that examines how a result will change if the original predicted data are not achieved or if
an underlying assumption changes.