Sensitivity Analysis
Topics
1 min read
Sensitivity analysis is a strategy you use to understand how different changes can impact your dairy farm's cash situation and overall business. This page explains how using this tool at budget time can help you avoid nasty surprises and seize good opportunities.
At budget time, undertaking sensitivity analyses and creating scenarios will aid your decision making, giving you a ‘what if’ picture and reducing chances of any unwelcome surprises.
Why undertake sensitivity analyses?
A sensitivity analysis on your budget helps you:
- Gain a clear picture of how exposed your cash position is to risk
- Understand the greater implications seemingly minor changes can make your broader business and financial picture
- Understand how your farming business can take advantage of good opportunities
- Act proactively when unexpected or adverse situations arise
How to undertake sensitivity analyses
Use DairyNZ's annual and monthly cashflow budgeting templates in budgeting tools to automatically complete sensitivity analyses.
The sensitivity tables look at the variability of cash surplus/deficit received when exposed to changes in payout, production and farm working expenses.
Sensitivity analysis example showing changes to production and payout
What would happen if?
- Your production decreases by 5% or 10% due to drought?
- Your production increases? Milk income lifts or drops?
- Key expenses spike (e.g. fertiliser costs increase by 15%)?
Consider these things in your risk and sensitivity analyses
- Milk prices
- Cost of debt
- Production
- Cow health expenses
- Farm working expenses (actual)
- Environmental risks - effluent, water quality, sediment, water-take
- Weather patterns
- Compliance costs
- Media policy
- Awareness of the local community and their perceptions.