A New Technology to Design

+1 561-717-9727 / +55 11 97632-9201

Pablo Sandler, Ph.D.

Posted on March 26, 2019

Designing remains one of the main needs when defining the company's strategic directions, for planning or even determining the economic-financial value (Valuation).

The inherent uncertainty in all future value, whether in the company's internal variables such as future demand for its products, selling prices; as well as external variables such as exchange rate, inflationary shocks, commodity prices; They play a major role in the construction of projections.

Currently used methods in which future values ​​are represented by a single number per period may represent barriers.

It is often attempted to move forward by building several scenarios, where for each of them different numbers per period are considered, trying to obtain a representation of uncertainty. It is latent when the realized values ​​are compared with the projected ones of the various scenarios, that the values ​​realized in a certain period may converge to a certain scenario, while in a later period they may behave as if they were in a different scenario. There will not necessarily be a convergence when we have different projections and different scenarios.

The projection horizons, it should be noted, in a model that aims to determine the company's valuation, have on average 10 years of explicit growth. This situation may make it impossible to choose a consistent scenario for the valuation calculation, which depends on projections. In these situations, companies end up making subjective choices that can move them away from the goal of building a valuation model, which after a few years can say that guided the company and its shareholders to make the best decisions.

In Nogah Tecnologia software, the projections are defined with probabilistic distributions, which allows to contemplate the uncertainty inherent in each prospective period for each company account and variable. Thus, the convergence for a given scenario is measured in a probabilistic convergence in the distributions that make up the projection in question.

In the graph below we can see a typical configuration of the Dashboard module that comes with the Financial Modeling & Valuation software. In the example, in the central column we can observe the probabilistic projections modeled in the software. In dark blue the most likely range of future occurrences for the variable in question, Sales, Operating Income and Profit, in this example. In intermediate and light blue the less likely bands, and in the clearest the possibilities of the so-called “long tails”.

Elit Capital

Nogah Dashboard: In addition to monitoring company performance, Project, or StartUp, period by period, helps to gradually structure your projection models through constant use.

In this example, we started the work by projecting 12 months. The month-to-month follow-up (on the screen above: orange line within the probabilistic range of projections in shades of blue) against the probabilistic projections allows both the analysis of the company's performance and the adjustment of the prospective model in order to renew the projections automatically.

The concept of scenarios (selection in Dashboard screen above) we keep reserved for that reality outside the company, such as the macroeconomic scenario, external shocks, competitive environment, etc.

The truth is that when we design it is easier to contemplate a probabilistic range for the value in question, based on both past goals and planning and actual values ​​incurred, than projecting exact values.

Data for this work exists in companies, but is generally not used in traditional methods. There is an obsession with observing the values ​​incurred in the past to extrapolate them for the future, but it disregards all the goals, analyzes, capacity sizing that the company made prior to the value realized. We need to note the difference between what the company planned, set as goals, and what it actually achieved. These differences, among others, are very dynamic, that is, we need to follow their evolution over time, because it is precisely these differences that represent the uncertainties and allow us to define the distributions that make up the future projections.

For more information, or to model your project or business, contact us.