Coping With Business Risk Through Probabilistic Financial Statements

Abstract

Today's financial environment is a broad arena with many uncertain economic, political, and operational factors. Because of this widespread uncertainty, corporations of all sizes are turning to financial forecasting models. For the most part, however, these models are deterministic and do not consider the riskiness, or likelihood, of the projections fed to them. Our model includes risk explicitly through the introduction of Monte Carlo techniques into a traditional corporate model. The resulting model produces both standard financial reports and the associated probabilities of occurrence, confidence intervals, and standard deviations. The model, which has been validated by historical comparisons, allows the planner to test many scenarios and deter mine the likelihood of satisfactory financial performance.