Both sensitivity analysis and scenario analysis are important tools for modeling financials and decision-making that help to grasp uncertainty and evaluate risk. Sensitivity analysis changes one variable and looks at how it affects the outcome of a model, while taking multiple variables into an analysis simultaneously moves forward under scenario analysis to understand the various potential outcomes that will arise in the future. Sensitivity analysis is more focused on specific variables and simpler, whereas scenario analysis provides a more holistic view of how different combinations of factors might affect results. Both tools are often used in conjunction with methods like Discounted Cash Flow (DCF) analysis to assess the robustness of financial projections and the impact of varying assumptions.

Uncertainty and variability are characteristic of finance, business strategy, and the world of risk management. This means that managers have to be confronted with those uncertainties and dealt with them using tools such as sensitivity analysis and scenario analysis. Such tools determine the consequences of the modification of different variables on the models and business-related decisions. The application of these tools will enable the managers, analysts, and investors to evaluate potential risks, drivers of performance which are critical for performance, and base decisions on varied potential future scenarios. These two have a unique strength and weakness, making it imperative that one understands how they compare and contrast in other contexts. This paper discusses sensitivity analysis and scenario analysis, their uses, advantages, limitations, differences, and their relationship with other financial models, like Discounted Cash Flow (DCF) analysis.