How Financial Models are used to Evaluate Business Risks 27 Jun 2017

How Financial Models are used to Evaluate Business Risks

There are higher demands for accurate risk models since the credit crises of 2008, which led to a more strategic, disciplined, and robust approach to Financial Modeling for risk assessment. In recent years, companies have begun using Financial Modeling as a way to evaluate potential risks in order to provide answers for tactical, operational, compliance, and other forms of risk that can impact business operations. It’s no longer enough to look at historical data to inform decision making; businesses have to look to the future as well.

Instead of simply understanding the numbers that Financial Modeling provides, organizations require a higher level of scrutiny and evaluation for strategic business support. Financial Modeling is used to determine and measure current or future risks for your organization. There are diverse techniques and tools available that can be used to forecast the likelihood of business risks, and being able to assess the probable outcomes and impacts of financial situations can constructively propel your business success.

Financial Models can be utilized to better understand a particular risk, design strategic objectives, or answer specific questions. Additionally, they’re used to predict the outcomes and impacts of any individual, business, or portfolio, as well as determining how systems behave under normal operating conditions under hypothetical “what if” scenarios.

Why Businesses are Using Financial Modeling for Risk Evaluation

The rapid increase in Big Data in recent years has caused organizations to utilize financial analysis to make the most of their data, and apply it towards addressing business risks. The sheer volume of data being generated by companies enables them to apply it towards the critical decision-making process, and use advanced analytic techniques, like Financial Modeling, to address certain potential risks that may affect their business strategies.

A business uses Financial Modeling to simulate business events to decide which direction is best, to have the best possible impact on their organization. When used to address specific business challenges like risk assessment, it can guide companies into making smarter investments, plan for future outcomes, and obtain intelligent insights into particular risk scenarios. Using financial modeling, companies can build and test complicated and intricate models with complete accuracy that will ensure that they are evaluating potential risks comprehensively.

However, there are certain challenges that arise when using Financial Modeling to address business risks:

  • Making sure the right data is gathered.
  • Ensuring that decision makers trust the models enough to apply them towards meaningful decision making.

This is why it’s important to rely on professional Financial Modeling services to sidestep these potential challenges, and establish that the right data, tools, and techniques are used, as well as the right approach to modeling, to reveal trustworthy results.

Address Potential Risks Effectively

Organizations need to be able to identify, assess, and mitigate potential risks in financial investments. Investors and managers analyze potential losses for investment to reduce uncertainty. Having the ability to identify possible negative outcomes in financial investment, analyze and assess risks in a variety of ways, and arrange and prioritize those risks, will allow you to control these risks.

Being able to control financial situations is the main focus of Financial Modeling. You can plan and address probabilities for all of your risk based scenarios, and respond to them by designing simulations in which the risks are reduced, removed, and fixed. You can track these risks in relation to your scenarios and take appropriate actions where necessary.

Potential risk scenarios that can be evaluated using Financial Models:

  • Evaluating investment potential
  • Reviewing inaccurate statistical calculations for group comparison
  • Return on investments
  • Growing or expanding a business, or determining if the market is viable for entry
  • Evaluating the impact of acquisitions 

The Value of Financial Modeling

Meeting new demands for regulators and decision makers is crucial as the quality of financial model integrity is being more highly scrutinized. The demand for data-informed knowledge is increasing as our world becomes more digitally reliant, and there’s a corresponding escalation in demand for deriving valuable insights from Financial Models. Business intelligence systems and platforms are becoming digitalized and sophisticated, using new tools and applications that bring even more context to financial models, as they are being designed to support the surge in data. Skilled professional analysts who are knowledgeable in Financial Model Development are an additional asset as they can better understand and interpret the data that can lead to reducing potential risks within organizations.


Utilizing business data to determine how to address risk is a smart move for businesses of any industry. It’s crucial to have the information, via a Financial Model, that will enable organizations to target potential scenarios that could have a considerable impact on their success moving forward.

Enlisting the aid of professional Financial Modeling services from experienced analysts can help you make the most of your business strategies, and ensure that you have the evaluative support to make actionable decisions based on accurate models.

When business strategies and objectives are affected by unknown risks, it’s best to be equipped with insights that will guide you in the decision-making process, and help your businesses succeed.

– Research Optimus

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