Effectively use predictive management to drive the strategic financial planning process

When planning the strategic direction of the business, finance organizations, like yours, strive to create financial returns that will satisfy, even delight, stakeholders.

To the extent that you know the future to be uncertain—and this becomes magnified when making critical business decisions—the measure and impact of this risk must be captured in your strategic planning process.

Yet you should not shy away from risk. Without risk, there is no opportunity for profit. You gain a competitive advantage when you become skilled and swift at framing business decisions that maximize opportunities while mitigating risk and understanding uncertainty; and your company gains when this frame of mind becomes the norm across the enterprise.

Crystal Ball is a Microsoft® Excel®-based suite of analytical tools that includes Monte Carlo simulation, optimization, and forecasting. With little effort, you can apply these advanced analytical techniques to your new or existing spreadsheets to create more accurate financial predictions and better informed business decisions. With Crystal Ball tools, you can:

• Mitigate Risk in ROI and NPV calculations
• Gain immediate insight on driving variables and output variations
• Make knowledgeable decisions on where to focus resources
• Replace min/max estimates with more accurate range of all possible outcomes
  Provide decision-makers with factual data that shows the risk associated with each choice
• Consider multiple aspects of problem such as constraints, goals, and requirements,
• Improve decision time and reduce the costs of resources,
• Replace costly “what if” iterations with automated procedures,
• Optimize processes, products, or portfolios,
• Perform efficient asset allocation given budgetary constraints and other requirements
  

Key features of interest to your industry include sensitivity analysis, correlation, optimization, efficient frontier, and historical data fitting. The sensitivity analysis helps you to understand which of the uncertain input variables are most critical and drive the uncertainty of your cost model. Correlation lets you link uncertain inputs and account for their positive or negative dependencies.

Optimization helps determine optimal decision choices to maximize or minimize your goals (e.g., maximize the return on a portfolio of assets), and efficient frontier runs multiple optimizations to determine the best balance of risk and reward for a particular problem or portfolio. If historical data does exist, the data fitting feature will compare the data to the distribution algorithms and calculate the best possible fit and parameters for your data.

FINANCIAL ANALYSIS WITH REAL OPTIONS

Real-options analysis applies financial options theory to capital investments. Why is it a real option? It is "real" because you are investing in operating capital instead of financial capital. It is an "option" because you are investing in the right, but not the obligation, to invest.

Real options are used in situations where management has flexibility in large capital budget decisions with high uncertainty. Some examples include research and development projects, mergers and acquisitions, technology development, facility expansion, e-business project prioritization, enterprise wide risk management, business unit budgeting, licensing, contract valuation, and intangible asset valuation.

• Identify, value, select, and prioritize capital investments
• Gain additional insights into strategic value and management flexibility in decision-making
• Correctly value a project's total value, including its strategic intrinsic value
  
• Identify and frame strategic opportunities
• Use a reliable, repeatable, and consistent process for decision-making
• Analyze multiple decision pathways
• Incorporate new assumptions over time as opposed to the requirement of defining all assumptions at the outset for net present value (NPV) analysis
• Perform Monte Carlo simulation of risk variables, which lets you quickly run hundreds or thousands of “what-if ” scenarios and determine the probability of a given scenario happening
• Minimize the possibility of making detrimental decisions
• Value investment decisions that cannot be otherwise valued

> Visit our Real Options application page for more information

> Learn more about Crystal Ball Premium Edition

LEARN MORE ABOUT CRYSTAL BALL FOR COST ESTIMATION

This page offers links to a growing number of resources, including recorded Web seminars, articles, white papers, case studies, and example models. Additionally, you can view a list of common uses and examples reported directly from customers using Crystal Ball. You can also download a free trial version of Crystal Ball to see how it can help improve your business forecasts and decisions!

RECORDED WEB SEMINARS

Risk-Cost-Benefit Analysis of Installation of Additional Benzene Emissions Controls The risk-based cost benefit analysis of a decision to install additional airborne emission control equipment involves multiple input factors related to the current and future throughput of the facility (as related to anticipated benzene vapor emission levels), and the cost of new equipment, and its installation and operation during its projected operational life.  Information related to potential health risks is required also, including: (1) the airborne transport of vapors from the facility to a nearby city, (2) the anticipated exposures of children and adults at key locations in the city, (3) the toxicity of inhaled benzene vapor, and (4) the population of the city.   This information can be combined to estimate the costs of new emission control equipment and the resulting benefit described as the number of cancer cases in the city population avoided by its use.  This presentation describes how Crystal Ball can evaluate the uncertainties of these input factors to determine which uncertainties contribute to the overall risk-based cost benefit ratio, and to its related decisions.  Presented by Frank Edison, Ph.D., Shaw Environmental & Infrastructure, Inc. Recorded May 1, 2008	View recording     Download files
Capital Project Evaluation and Optimization with Crystal Ball Tools Learn how to use time series forecasting to estimate future market share, how to use optimization of product pricing over product life to maximize profit, and how to perform valuation of strategic flexibility to expand production in strong market conditions. The conclusions of the seminar focus on the dramatic transformation of the original single point-estimate profit forecast, into a more realistic and valuable assessment of expected profit, risk, and key drivers that guide management in its decision-making. Presented by Steve Hoye, Senior Risk Consultant at Oracle Recorded October 3, 2007	View recording No downloads
Modelo de Valoración Financiera Para Proyectos de Construcción Lo que se propone con esta metodología es una forma más precisa de realizar un análisis financiero por medio de un modelo que permita involucrar el comportamiento de las variables macroeconómicas y microeconómicas que afectan el sector, a través de la proyección de un flujo libre de caja, el cual se descuenta al WACC. Presented by Sebastián Castaneda, Experto internacional en Crystal Ball y Real Options Analysis Toolkit Recorded September 27, 2007	View recording Download files
Cash Flow at Risk – Electronic Chip Production Profitable production of electronic circuitry runs the gauntlet of unique technical and marketplace hurdles, all of which involve risk and cost. Many of these costs require stochastic models, because single point analysis fails to value various aspects of cash flow at risk. Presented by Alan Gorlick, financial consultant and University of Phoenix faculty member Recorded September 25, 2007	View recording Download files
The Value of Predictive Analytics in Strategic Corporate Finance A high-level overview of how simulation and optimization can be used in strategic corporate finance, the benefits that can be gained over typical deterministic analytics. Presented by Steve Hoye, Senior Crystal Ball Risk Consultant Recorded May 31, 2007	View recording Download files
Integrating Risk Analysis Tools in Financial Analysis Forecasting, simulation, real options and optimisation techniques are increasingly popular tools that provide Financial Analysts with analytic power beyond the traditional toolset. This web seminar is designed for both the beginner and advanced financial analyst and will fully cover the A to Z of applying risk analysis techniques. Presented by Dave Hammal, Crystal Ball Product Consultant Recorded April 26, 2007	View recording Download files
Mastering a Key Strategic Challenge: Sustained Value Creation through Business Cases There are few tasks as important, or as difficult, as deciding upon a new strategic direction for your organisation. Many people still rely on traditional cost-benefit-analysis, NPV, ROI, and decision trees, when developing business cases. This seminar provide case studies with insights that helped decision makers create more valuable strategies, assure robustness and sustainability, and align their organisation for execution. Presented by Dr. Volker E. Pollmann, Ph.D, a Managing Director at Solution Matrix Recorded March 28, 2007	View recording Download files
Financial Modeling: Empower Your Spreadsheets with Monte Carlo Simulation Using "single point estimates" might not be dead, but after this Web seminar, you will never see financial modeling the same again. Learn how to turn static Microsoft® Excel data and financial models, into true risk models and how to apply Crystal Ball to financial modeling. Presented by John Charnes, Professor, Scupin Faculty Fellow, and former Director of the Finance, Economics, and Decision Sciences Area in the University of Kansas School of Business Recorded March 27, 2007	View recording Download files
Financial Risk Analysis: “Know/No Surprises” With the help of a series of simple Excel spreadsheet models, you will learn how to apply simulation and optimization to answer questions such as: what will my revenues be in the next period, how should I set our financial goals, what should be my earnings guidance, and more. Presented by Jim Franklin, CEO of Decisioneering Inc Recorded January 18, 2007	View recording Download files
Integrating Risk Analysis Tools in Financial Analyses With the help of an integrated financial model, this seminar will provide financial analysts with a complete understanding of why, where and how to apply spreadsheet forecasting, simulation, real options and optimization within their analyses. Presented by Crystal Campbell of Decisioneering, Inc. Recorded November 9, 2006	View recording Download files
Financial Modeling: How To Marry Common Sense And Math, For Real-World Modeling Learn how to use Crystal Ball in long-range planning, sensitivity analysis, and volatility comparison modeling. Emphasis is placed on laying out a simple framework, identifying real-world problems that undermine mathematically sophisticated approaches to modeling, showing "good-enough" workarounds, and reconciling multiple forecast perspectives. Presented by Mark Odermann, Senior Financial Analyst in Financial Strategy with Microsoft Corporation's Business Division Recorded November 1, 2006	View recording Download files
Riesgo Operacional: El reto contemporáneo de la banca internacional Al finalizar el seminario, habrás entendido: La importancia de la aplicación del método de simulación de Monter Carlo para manejar los fenómenos continuos y discretos que se presentan en la gestión del Riesgo Operacional; Los compromisos de la industria financiera frente al ACUERDO DE BASILLEA II; La invaluable ayuda que nos ofrece Crystal Ball en la creación de modelos de simulación para el análisis del Riesgo Operacional. Presented by Camilo Romero, Experto internacional y entrenador certificado en Crystal Ball y Real Options Analysis Toolkit Recorded 25 de Mayo de 2006	View recording Download files
Creating Enterprise Value: Maximize Shareholder Wealth by Strategically Allocating Capital using Monte Carlo Simulation Learn how Crystal Ball software and Monte Carlo simulation can be used to allocate capital and measure the risk-adjusted economic profitability of a structured loan. Presented by Michael J. Eisenstein, Director at Quantitative Solutions In. Recorded May 18, 2006	View recording Download files
Risky Business: Gain a Competitive Advantage by Learning How to Control Risk Learn how to identify and then control uncertainty in your capital investment projects so you can take advantage of promising, yet risky, opportunities. Presented by David Vose, of the Vose Consulting Group Recorded February 2, 2006	View recording Download files

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WHITE PAPERS & ARTICLES

An Application of “Earning at Risk” to Assess Corporate Financial Risk Yeon-Jeong Chang, Senior Risk Consultant, Eretec Inc.	Download
Assessing New Venture Risk and Cash Budgeting with Simulation By David C. Barker, Charles R. Harrell, Robert H. Todd (click here to download the accompanying model)	Download
Business Intelligence Building Blocks: A Strong Business Case Gets Results By John L. Doran, EnFORM Consulting, L.P.	Download
Corporate Finance Risk Analysis with Crystal Ball - Are We Adding Value? By Huybert Groenendaal, Partner, Vose Consulting US LLC	Download
Corporate Risk Analysis By Tore Olafsen, John Martin Dervå, Roger Pullen, ValueSim	Download
Evolución Del Saldo Remanente De Una Renta Unitaria Cierta Cuando Los Rendimientos Son Aleatorios Bajo Distintos Modelos De Riesgo By Evaristo Diz, E. Diz Actuarial Services and Consulting (this is a Spanish-language paper)	Download
Forecasting Financial Returns on Capital Investments (only available as presentation) By Donald J. Haugh, Senior Manager for Process and Product Development, Seagate Technology	Download
Forecasting Shareholder Value: The Missing Objective in Balanced Scorecards John Schuyler, Principal / Consultant, Decision Precision and PetroSkills	Download
Modeling the Financial Impacts of Fluctuating Exchange Rates, Interest Rates, and Commodity Prices By Stuart Veale, Investment Performance Institute	Download
Monte Carlo Simulations and Corporate Risk Management in Germany By Diana Wieske and Rolf van der Meer	Download
Price Optimisation By Using Business Risk Analysis and Game Theory By Dr. István Fekete, Business Services Line of Business Matáv Rt., (Hungarian Telecommunications Co. Ltd.)	Download
Pricing American Put Options using Simulation & Optimization By John Charnes, University of Kansas School of Business	Download
Security Analysis using Discounted Cash Flow Modeling: Simulation Applications By Catherine Shenoy, Director, Applied Portfolio Management, University of Kansas, School of Business	Download
Sharper Estimates of Derivative Values By Dr. John M. Charnes, University of Kansas School of Business (on Financial Engineering News Web site)	Download
Using Simulation for Option Pricing By John Charnes, University of Kansas School of Business	Download
Using Simulation Modeling to Ensure ROI By Henry Yennie, CNH Consulting (hosted on CNH Consulting Web site)	Download
VaR using Montecarlo Technique By Evaristo Diz, E. Diz Actuarial Services and Consulting (this is a Spanish-language paper)	Download
The Weighted Average Cost of Capital By Tore Olafsen and John Martin Dervå, ValueSim	Download

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CASE STUDIES

Assessing Risks of Commercial Loans SunTrust "Banks" On Crystal Ball For Assessing The Risk Of Commercial Loans	Download
Financial Services Consulting Banker's Trust uses Crystal Ball in Developing Award-winning Risk Management Group	Download
Maximizing Shareholder Value Deloitte & Touche Helps Maximize Clients' Shareholder Value with Crystal Ball	Download
Negotiating Financial Settlements Pacific Bell Calls Upon Crystal Ball To Help Negotiate Financial Settlement	Download
Portfolio Optimization For ProVise Management Group, Crystal Ball is the Key to Optimizing Portfolio Profit	Download
Simulation in Financial Risk Management Rolf van der Meer of Deutsche Bank AG presents a case study about Berliner Maschinen AG. (click here to download the accompanying model	Download

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EXAMPLE MODELS (for demonstration purposes only)

Assessing New Venture Risk and Cash Budgeting with Simulation From: David C. Barker, M.S., Facility Engineer, Information Systems Manager Supply Chain Management Nevada, Inc., UPS Worldwide Logistics Group, 2275 East Newlands Drive, Fernley, NV 89408, (775) 575-3732, dcbarker@upslogistics.com Detail: This model accompanies the paper of the same name located in our online article library (click here to view the paper). The purpose of this article and model is to show how simulation, when combined with a traditional cash budget, can greatly help assess the risk of investing in a new venture. The information gained by simulation-based cash budgeting can be very valuable to financial managers and venture capitalists in search of a viable way to assess the risk of starting a new venture.	Download For: Crystal Ball Level: Simple
Black-Scholes Model (vs. Simulation) From: Stephen Black, PA Consulting Group, Stephen.Black@paconsulting.com (the author is happy to accept comments) Detail: This is a simple demonstration of how to replicate the Black-Scholes result via a simulation. Its shows two different ways to simulate option value via Crystal Ball: a multi-step simulation where you can see the intermediate results and a single step one where you just see the result. Both methods are compared to an actual Black-Scholes calculation (a VB function is included for that purpose).	Download For: Crystal Ball Level: Simple-moderate
Capital Investment Analysis for Two Industrial Plants From: Egberto Lucena Teles, accountant, master in accounting, academical professor - Universidade Mackenzie (São Paulo, Brasil), egberto@mackenzie.com.br Detail: New projects can involve the acquisition of capital goods - tangible assets of long useful life as lands, immobile or machines and industrial equipment. Considering a proposed project of capital investment, the investors should evaluate the expected future cash flows in relation to the amount of initial investment. The objective of the analysis through the method of discounted cash flows is one of finding projects that have a net present value (NPV) positive. In the proposed example, the financial director should make a decision of capital investment in a new industrial plant. The excluding alternatives, that will call Plant A and Plant B, involve a cash flow of a period of six years. The Old Plant (Current) generates a cash flow to present value of $38,211,000. Besides verifying which Plant (A or B) offers Cash Flow Increment in relation to Current Plant, this model tests the implicit risk with relationship to expected return (cash increment). Two models are included, one for each Plant.	Download For: Crystal Ball Level: Simple-moderate
DCF Analysis - AllergyGone Detail: Your pharmaceutical company is very interested in acquiring AllergyGone, a potential new anti-allergy drug with no known side effects. You have been asked to produce a Discounted Cash Flow (DCF) analysis of AllergyGone over a five-year period to determine if this product is worth acquiring. Because of the uncertainty in the product pricing, demands, and costs, your company has decided to use Crystal Ball to simulate the Net Present Value (NPV) and Internal Rate of Return (IRR) prior to negotiations. Crystal Ball can help you to determine a bottom-line negotiation price and the model variables that drive the variability in the NPV and IRR forecasts.	Download For: Crystal Ball Level: Simple-moderate
Loan Amortization Example Model Detail: How much can I save in interest expenses? By how much can I shorten the life of the loan? These are questions that most of us with car payments or mortgages have asked ourselves. This model allows you to answer these questions and more by applying Monte Carlo simulation. The model calculates your monthly payment, cumulative interest on the loan, and the total cost of the vehicle (the purchase price plus the cumulative interest). You can then enter a custom payment and custom interest rate in the loan assumption input cells. The custom payments columns display what you would save in interest, the number of months by which the loan would be reduced, and the extra amount you would have to pay per month. The model includes amortization tables for both the minimum required payment and custom payments.	Download For: Crystal Ball Level: Simple-moderate
Pro Forma Net Income Statement Detail: In the past, ABC company used a rolling six-month average to estimate future sales. It did not have a handle on any other uncertainties in its Net Income model. This model shows how they used CB Predictor to forecast sales and then Crystal Ball to determine the certainty of reaching a specific earnings per share goal.	Download For: CB Predictor & Crystal Ball Level: Simple
Product Forecasting - Interactive TV Sales Detail: This model examines a product marketing and forecasting analysis of an emerging media product, Interactive TV (ITV). Colorado Cable has created a discounted cash flow (DCF) analysis that examines the success of the product over a six-year period. Monte Carlo simulation and time-series forecasting are used to provide a greater understanding and quantification of the risks inherent in a spreadsheet-based business forecast. This is the model featured in our Telecommunications quick demo, which walks you through how the model was used and what it proved.	Download For: Crystal Ball & CB Predictor Level: Simple
Risk in Financial Forecasts Application for Valuation, Strategic Planning and Capital Appropriation Decisions From: David T. Hulett, Ph.D., Principal, Hulett & Associates LLC, Project Management Consultants, 12233 Shetland Lane, Los Angeles, CA 90049 www.projectrisk.com Detail: Financial forecasts are notoriously uncertain. This model is a simple and clear demonstration of how to use Monte Carlo simulation to calculate the IRR of a project over a five-year period. The description worksheet discusses the details, assumptions, and results of the model. The model is (c) 2000 International Institute for Learning.	Download For: Crystal Ball Level: Simple-moderate
Simulation to Determine the Effect of a Strip Hedge Detail: The goal of this model is to see the effects of interest rate uncertainty on borrowing $100 million over a four-quarter time frame.	Download For: Crystal Ball Level: Simple-moderate

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COMMON USES & EXAMPLES

The following examples were provided by our customers and represent only some of the potential corporate finance applications for Crystal Ball.

• Analysis of transactions risks and opportunities
• Basel II compliance
• Budgetary cost projections
• Business valuation, financial forecasting and project evaluation
• Capital budgeting analysis
• Capital budgeting for replacing aircraft
• Cost estimate projections
• DCF analysis
• Demand and yield forecasting
• Discounted cash flow analysis
• Estimates for leasing and cash flow analysis
• Evaluating investment options
• Evaluation of capital investment proposals, acquisitions, and new business startups
• Exploration of equity partnerships and the involved risk and exposure
• Feasibility studies on capital investments
• Financial and Risk Modeling, Cash flow analysis, portfolio stress testing and scenario analysis
• Interest Rate Risk Management
• Interest sensitivity analysis
• Lease vs. buy analysis
• Model complicated securities and investment strategies
• Modeling sensitivity analysis for bid proposals
• NPV analysis
• Optimisation of investments across different asset classes
• Optimization of revenue
• Option and asset pricing
• Portfolio analysis, fund risk characteristics, market analysis
• Prepare a Business Case on aircraft purchase for a client airline
• Project and business analysis
• Real options analysis
• Risk models for retirement plans
• Share award valuations under IFRS 2
• Simulation of valuation scenarios
• Six Sigma project work Capacity & staffing models
• Stock performance projections
• Structured finance model building and confidence testing
• Valuing non-traditional financial instruments like share appreciation rights indexed to the performance of benchmark firms
• VaR calculations for projects
  

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TEXTBOOKS

Analyzing and Managing Risky Investments

Business Forecasting, 8e

Essentials of Business Statistics

Financial Management: A Practical Guide to Value Creation

Financial Modeling with Crystal Ball and Excel

Quantitative Business Modeling, 1/e

Quantitative Methods for Business, 8/e

Scientific Financial Management : Advances in Financial Intelligence Capabilities for Corporate Valuation and Risk Assessment

Stochastic Modeling: The New Way to Predict Your Financial Future

Valuation and Pricing of Technology-Based Intellectual Property

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