Video: Quantitative risk analysis: how not to lose in business?
2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43
Today, in a large number of draft business plans, even if they have an appropriate section containing an analytical aspect, the problem is narrowed only to an analysis of financial or banking risks and does not reflect the full range of risks. However, professionals need to widely use both qualitative and quantitative risk analysis. Let's dwell on the second type.
Quantitative analysis only applies to risks identified in the qualitative analysis process as having a significant impact on the achievement of the stated objectives. When conducting such an analysis, the effect of such events should be assessed with the assignment of a certain digital rating.
Quantitative analysis may sometimes not be needed to develop effective risk responses. The most common analytical methods commonly used are:
- researchsensitivity, which involves determining the reflection of the degree of uncertainty of each individual element of the business project while accepting other elements of the base value;
- Considering the predicted monetary value by multiplying each value by the probability of its occurrence, the results are summarized.
Quantitative analysis of any investment project determines the numerical value of some risks. It is based on the territory of probabilities, theory of operations research and mathematical statistics.
Quantitative analysis is carried out in case of occurrence of two conditions: a basic calculation of a business project and a full-fledged qualitative analysis. Its task is to numerically measure the influence of certain changes in factors on the dynamics of criteria that show the effectiveness of the project.
The following methods of quantitative analysis of business projects are often used:
- analysis of performance indicators such as net present value and rate of return, as well as the profitability index;
- adjustment of the discount rate;
- Monte Carlo method (second name - simulation modeling);
- building a decision tree.
All the listed analytical methods of business projects are based on probabilistic approaches.
Quantitative and qualitative analysis and their effectiveness directly depends on the requirements for the final indicators(results), information base and planning reliability level. So, for example, for small projects, quite effective methods are: analysis of the adjustment of the discount rate and sensitivity. For large projects, it is simulation modeling and the construction of curves of probability distributions. If the result of the project depends on the adoption of some decisions, it is necessary to build a decision tree.
Thus, analysis methods should be applied in a complex manner using their simplest varieties at the appraisal stage, and more complex and requiring additional data - in the resulting justification of business projects.
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