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Test your budget assumptions
- 1. Assess risks for decision-making Hernan Huwyler, MBA CPA Test your budget assumptions
- 2. Assumptions Best Base Worst Growth in demand 7% 5% 2% Price increase – inflation (in real terms) 2% 0% -7% Days of outstanding sales 50 days 70 days 180 days Impact on cash flow Growth in demand 2% 0% -5% Price increase – inflation (in real terms) 8% 0% -15% Days of outstanding sales 5% 0% -10% Scenario analysis Cashflow % Occurrence Best €50M 20% €30M Base €40M 50% Worst €0M 30% Cash flow w/ scenario analysis Cash flow w/o scenario analysis Budget Modeling
- 4. Project Net Cash Flows Best case (5%) Worse case (95%) Risk of being short of cash after overoptimistic assumptions Estimated cash flow 1 2 3 4 5 6 7 Year
- 5. Trade-off between risk and profitability Choose between capital investments Allocate available capital Identify competitive advantages Internal rate of return Low risk and return High risk and return A B Risk and Return Risk exposure Net present value at risk as % investment
- 6. Extract key assumptions used on • Businessplans • Budgets • Bids Improve the used planning models to analyze the volatility on the assumptions Run +10,000 random simulations Analyze results • Histograms • Lossexceedance curves • Tornadocharts Monte Carlo Simulations
- 7. Planning assumptions Volatility Sales 1,000 90% sure between 800 to 1,100 - Variable costs (600) 80% sure between 450 to 800 - Fixed costs (300) 95% sure between 280 to 320 Profit 100 Monte Carlo Simulations
- 8. 800 1,100 # cases 90%cases 450 800 # cases 80%cases Sales Variable costs Fixed costs 280 320 # cases 95%cases Plan 1,000 Plan 600 Plan 300 Monte Carlo Simulations
- 9. Sales 800 1,100 # cases 90%cases Ln (Max) + Ln (Min) 2 Standard Error P(A), μ = , σ = Single Loss = Ln Ln (Max) - Ln (Min) Confidence Interval Standard Error 80% 2.56 90% 3.29 95% 3.92 99% 5.15 Monte Carlo Simulations
- 10. Sales 800 1,100 # cases 90%cases Monte Carlo Simulations 1400 1200 1000 800 600 1 346 691 1036 1381 1726 2071 2416 2761 3106 3451 3796 4141 4486 4831 5176 5521 5866 6211 6556 6901 7246 7591 7936 8281 8626 8971 9316 9661 Plan 1000, 75.1%
- 11. 1200 1000 800 600 400 200 1 335 669 1003 1337 1671 2005 2339 2673 3007 3341 3675 4009 4343 4677 5011 5345 5679 6013 6347 6681 7015 7349 7683 8017 8351 8685 9019 9353 9687 450 800 # cases 80%cases Variable costs Plan 600, 2% Monte Carlo Simulations
- 12. 280 320 250 290 270 310 350 330 1 324 647 970 1293 1616 1939 2262 2585 2908 3231 3554 3877 4200 4523 4846 5169 5492 5815 6138 6461 6784 7107 7430 7753 8076 8399 8722 9045 9368 9691 # cases 95%cases Fixed costs Plan 300, 57.8% Monte Carlo Simulations
- 13. Loss Exceedance Curve -1000 -800 0 -200 -400 -600 200 600 400 1 224 447 670 893 1116 1339 1562 1785 2008 2231 2454 2677 2900 3123 3346 3569 3792 4015 4238 4461 4684 4907 5130 5353 5576 5799 6022 6245 6468 6691 6914 7137 7360 7583 7806 8029 8252 8475 8698 8921 9144 9367 9590 9813 Plan 100, 98% Plan has 98% chances to fail
- 14. Tornado Chart Sales Variablecosts Fixed costs +600 -800 Key: ensure the efficiency of controls reducing variables costs