I ALREADY HAVE A BUSINESS PLAN. WHY DO I NEED ALSO A SIMULATION MODEL? You definitely need a business plan, which you may write yourself or pay someone else to write it for your. However flashy and breathtaking charts it may include, and no matter how well written it may be, the whole package boils down to the profit to be obtained and the ROI (Return on Investment) to be achieved. That is the bottom line. Period. The obvious question then is, how realistic is the profit and the ROI you have determined in your business plan? As is usual in most cases, you may have calculated a best case, a worst case and a most likely scenario. During actual presentation to potential investors, you may also complement the latter with “What if” scenarios, by modifying some figures to show how the profit and ROI numbers would be impacted. Well the bad news is that said method is quite flawed. You should ask yourself (your investors will for sure!), how probable is the occurrence of the most likely scenario? What is the probability that the result would be the expected one or fall between your “Most likely” and “Best case” scenarios? Or between your “Worst case” and ”Most likely” scenarios?. Is it 5%, 25%, 87%..........? To say, ”Very likely” or “More or less likely “ will not do for many serious potential investors, and it should not do for you either.
We are of course departing from the premise that you want to succeed with your project. What if your sales are the best case, but expenses are your worst case? Or if your expenses and sales are the most likely scenario, but sales for the next year take a plunge? To work with averages will not solve the problem. Suppose you cannot swim but as the lake has a three feet average depth, you decide to cross it, and you drown. The problem was that, however the average depth was three feet, there was a ten feet deep hole. Can you imagine if a shoe manufacturer decides to make all his shoes in three sizes corresponding to the average sizes of the population of children, men and women? Your spread sheet based financial forecasts will be lacking, and not up to the task.
The good news is that you can change this by building and running a simulation model.
It is true that the great majority of business plans and presentation do not include a simulation model to back up their estimates. The reason for this is that the Monte Carlo simulation technique is a highly sophisticated tool used normally by bigger companies, who can pay the cost of the software and have their technicians building the models, run them and interpret the results. This is not expected from a small company or project, but in no way means it cannot be applied to them. Actually, it would be of great help and that is what we are offering at a very reasonable price. It would have a great impact on your investors, bank or boss, if you do include a simulation model, and you can tell them that the most likely scenario hasa, say, 96% certainty level of occurring. You may even analyze the plan made by someone else being currently evaluated, and inform your superiors that the probability of achieving the expected results is, say, 15%.
HOW DOES IT WORK? We do not know with full accuracy, what will happen in the future. While we do not know the exact amount of total sales for next month for example, we do know that it will be a certain figure. Which figure? This is what we don’t know. Suppose now for a moment, that you are able to generate hundreds even thousands of statistically valid possible results. This will create a distribution showing the probability of these results happening. Thus, we got a peek into the future by generating possible outcomes, with the corresponding probability percentages.
If we flip a coin, the theoretical probability of getting head or tail would be 50%. That does not mean that no matter how many times we flip a coin, exactly 50% of the times there will be heads, and exactly 50% of the time tails. It does mean however, that if you flip it hundreds or thousands of times, the tendency will be close to 50% in each case.
Now, continuing with the same example, a certain level of sales is the product of many scenarios factored in the estimations (worst, most likely and best case), such as the competition, market price, quality of the product, etc. This is much more complex than simply flipping a coin. However, we could illustrate the case, comparing it to flipping a dozen coins at the same time, hundreds or thousands of times. This is what a Monte Carlo simulation does, that is, tests the likelihood of forecasts, before a certain project is carried out, thus avoiding the huge cost of possible failure, spent resources and time wasted.
Actually, that is not all. It will also tell you, which variables are causing the greatest impact in the result. For example, you may find out that the high price for a certain quality of product may make it more difficult to reach the expected profit level. This knowledge will allow you to reformulate the model, by entering new prices, for example, if considered feasible, in order to increase sales and profits and thus reach your estimate.
IS YOUR SERVICE LIMITED TO CUSTOMERS IN THE U.S.? Absolutely not!. Any person or company can benefit from our services, no matter in which country they are located.
IS YOUR SERVICE LIMITED TO ANY SPECIFIC INDUSTRY, OR BRANCH OF BUSINESS, PUBLIC OR PRIVATE? Absolutely not!. There are no limitations whatsoever.
A SIMULATION MODEL SOUNDS TO ME AS LITTLE MORE THAN MATHEMATICAL ACROBATICS. Far from that. The first important thing is to understand what is being offered and how does the model work, for which you don’t have to be a rocket scientist. Remember, we are not talking here of you having all the mathematical skills and knowledge necessary to work with simulation models from scratch. What we are talking about mainly is to understand the results offered by such a technique, and for this, you hardly need any mathematical skills. In many cases, the simulation concept is not thoroughly comprehended, not because of lack of intelligence, but due to lack of interest to understand it.
Simulation models are used by most of the Fortune 500 corporations and many more companies of different sizes. There is no question this technique is of enormous value when making decisions under uncertainty. The results of a simulation model beats the guesswork any day!
ISN’T THIS TECHNIQUE REALLY FOR BIG COMPANIES OR BIG PROJECTS? Absolutely and definitely not! You may be trying to get funding for your beauty salon, a web based business, a grocery store, etc. Or perhaps you are putting together a presentation for your superiors involving forecasts or other projects involving uncertainty. Any, and we mean any company or person, no matter how small their company o project is, would benefit from our service. Irrespective of its size, to you, your project is the most important in the world, and you want to succeed. Our service can indeed help you!
HEY, I CAN DO THAT WITH MY EXCEL ! Do not kid yourself! The “sensitivity analysis” you can perform with your spread sheet entails a few modifications here and there, producing a few changes in the results. A Monte Carlo simulation model will randomly generate and process hundreds or thousands of “what if” possible outcomes, determining the corresponding probability values. Try doing that with your EXCEL!. One way of defining a Monte Carlo simulation model would be to say, that it is a spread sheet on steroids.
IS THIS A “PRE-PACKAGED” TYPE OF SERVICE? Absolutely not!. Each case requires back office work to analyze the problem, build the model and generate results for each individual client, specifically tailored for his or her particular case.
WHAT IS THE ORIGIN OF THE MONTE CARLO SIMULATION TECHNIQUE? It was developed within the framework of the Manhattan Project (the creation of the atomic bomb) by a polish mathematician. Nowadays, with the availability of fast computers and very powerful software, it is possible to run complex simulation models related to practically any area, where there is a decision to be made under uncertainty.
CAN YOU GUARANTEE THE RESULTS? Unfortunately not. But neither can any serious company in the world dealing with events occurring in the future. If you find a person or a company ready to provide a guarantee, it is because they are either overeager to sell their services and are thus not serious, or it is a scam.