The task of analysis in quantitative terms is to numerically measure the level of influence of changes in the risky conditions of the project, which are checked not only for risk, but also for the behavior of performance indicators. In our article, we will consider modern financial risks and methods for assessing them.
Basic techniques
Among the main quantitative methods for assessing financial risks, it is customary to single out the following:
- Statistical techniques.
- Analytical techniques.
- A method of assessing financial risks, involving an analysis of financial feasibility and sustainability.
- Methodology for assessing project costs.
- The method of expert judgment.
- Method for assessing financial risks using analogues.
Analytical methods
Zonal methods for assessing financial risks implies the following classification:
- Discounting.
- Analysis of the return on project costs.
- Assessment of damage from making a risky decision, which is possible.
- Break-even analysis of production.
- Sensitivity analysis.
- Sustainability analysis.
- Simulation (in other words, the Monte Carlo method).
- Scenario analysis.
- A technique called the “decision tree”, according to which the zonal methods for assessing financial risks are arranged according to the degree of complexity increase in the calculations performed.
Statistical Methods
So, we examined the classification of methods for assessing financial risks briefly. It is advisable to proceed to a detailed study of each of the categories. To begin with, we will analyze statistical methods for assessing the financial risks of an enterprise.
It is important to note that among the advantages of this class of techniques involving factor, regression, and analysis of variance, it is necessary to highlight a certain degree of universality. The root of their shortcomings is the need to have a substantial database. In addition, it is worth emphasizing the ambiguity of the conclusions obtained, some difficulties arising in the process of analyzing time series and so on.
In order to calculate the risks of economic activity, statistical methods for assessing the financial risks of an enterprise are rarely used. Nevertheless, recently, the cluster analysis technique has gained relative popularity, through which it is sometimes possible to capture data suitable for application. Cluster analysis is often used in the process of developing business plans. It is then that the total risk coefficient is calculated on the basis of data obtained by classifying risks into groups.
It must be borne in mind that the statistical method for assessing the level of financial risks consists in studying statistics of profits and expenses that were relevant in a particular or similar company. The main goal here is to determine the probability of an event, as well as to establish the magnitude of the risk.
Since risk is a probabilistic category, it is customary to use probabilistic calculations to determine its level in a quantitative plan. In this case, the degree of risk should be understood as the probability of a situation associated with losses, as well as the amount of damage from it that is possible.
In particular, the businessman’s risk in quantitative terms is characterized by nothing more than a subjective assessment of the expected, in other words, the probable value of the minimum and maximum loss (income) from capital investment. The larger the range between the minimum and maximum loss (income) under the condition of equal probability in terms of obtaining, the higher the level of risk. The larger the uncertainty of the economic situation in the decision-making process, the higher the level of risk. It is worth adding that the uncertainty of the economic situation, as a rule, is due to opposition, randomness or lack of complete information.
What have we come to?
Having considered the characteristics of statistical methods for assessing financial and economic risks, it is advisable to draw some conclusion. So, the risk has a mathematically expressed probability associated with the onset of loss. It is based on statistics and can be calculated on the condition of a fairly high level of accuracy.
To identify the amount of risk in a quantitative plan, one should have knowledge of all the possible consequences of a single operation, as well as the likelihood of their occurrence. Probability must be understood as an opportunity to get a certain result. As applied to the tasks of the economic plan, methods of probability theory, as a rule, come down to identifying values related to the risk of the onset of certain events, as well as to choosing from situations that are possible, the most preferable based on the maximum indicator of mathematical expectation. In other words, the latter equals the absolute value of a particular event, which is multiplied by the probability that it will occur.
Give an example
For a full assimilation of material regarding financial risk management and methods for assessing the financial risks of a statistical plan, it is advisable to consider an example. There are two options for investing capital, and it was found that in case of investment in project A, a profit of 250,000 rubles is credited with a probability of 0.6, and when invested in project B, in the amount of 300,000 rubles with a probability of 0.4.
In this situation, the expected receipt of funds from capital investment (in other words, the mathematical expectation) will be 150,000 rubles (250 x 0.6) for project A and 120,000 rubles (300 x 0.4) in accordance with project B.
Expert method for assessing financial risks
The most important place in the system of assessment methods is occupied by expert assessment, in other words, the implementation of the examination, the subsequent processing and application of its results in the process of substantiating the probability value. It is worth noting that the implementation of expert assessment must be considered as a set of mathematical-statistical and logical procedures, methods that are associated with the activities of an expert involved in the processing of information necessary for analysis and, accordingly, the adoption of certain decisions.
Risk level can be measured according to two criteria. We are talking about the variability (oscillation) of the possible result and the average expected value. Under the latter should be considered the value of the magnitude of the situation, which is associated with an uncertain event. The expected average value is considered the weighted average for all results that are possible. In this case, the probability of each of them is used as the frequency or weight of the corresponding value.
Let's look at an example.
Let us examine an example of a quantitative method for assessing financial risks. It is known that in the case of investing capital in Project A out of 120 situations, a profit of 250,000 rubles was obtained in exactly 48 cases (the probability here is 0.4), a profit of 200,000 rubles in 36 situations (probability 0.3), and profit of 300,000 rubles - in 36 situations (probability 0.3). So, the average expected value will be (250 x 0.4 + 200 x 0.3 + 300 x 0.3) = 250,000 rubles. Similarly, you can find that when investing capital in project B, the average profit is (400 x 0.3 + 300 x 0.5 + 150 x 0.2) = 300 000 rubles.
As a result of comparing the two amounts of expected profit, it can be concluded that when investing in project A, the amount of profit varies from 200,000 to 300,000 rubles and the average is 250,000 rubles; when investing capital in project B, profit ranges from 150,000 to 400,000 rubles, and the average value is 300,000 rubles.
Analytical techniques
Consider the analytical methods and indicators for assessing financial risk. Practice shows that they are used very often. The advantage in this case is that they are quite well designed and very simple in terms of understanding. The analytical methodology includes assessing the sensitivity of the project to certain changes in parameters, as well as assessing the financial stability of a company or enterprise.
Among the indicators of the analytical method for assessing financial risks, it is important to note the following:
- Break-even point.
- Sensitivity coefficient.
- Sustainability ratios financially.
It is advisable to consider each of them separately. So, the sensitivity coefficient is used to assess non-diversified (systematic) risk in a quantitative plan, which, as far as is known, is primarily associated with general market fluctuations in profitability and prices. Sensitivity analysis should be understood as the easiest way to quantify the risks that are most often applied in practice. Its key objective is to determine the degree of impact of each of the factors that vary on the overall result of the project. As an information basis, the data on the cash flow of an investment project are relevant here. As integral indicators characterizing the results of the project, as a rule, performance criteria are considered in the project plan. In the process of the standard sensitivity analysis used in relation to the project, a sequential single effect on the final result (in other words, the project efficiency) of the only variable parameter (variable, factor) is examined, which is checked for risk, provided that the remaining parameters remain unchanged.
It is important to know that the calculation of the sensitivity coefficient is as follows:
- Determination of the main indicator in relation to which the sensitivity assessment is carried out (net produced income, internal rate of return, etc.).
- Identification of factors (state of the economy, inflation rate, etc.).
- Determining the value of the main indicator at various stages of the project (procurement of raw materials, production, sales, capital construction, transportation, etc.).
The sequences of receipts and expenditures of financial resources formed in this way involve the determination of the flows of money funds for absolutely every moment, in other words, the calculation of performance indicators. Next, tables or diagrams are constructed that reflect the dependence of the named resulting indicators on the parameters of the original type. When comparing the obtained diagrams with each other, it is possible to calculate the so-called main indicators that have the maximum impact on the assessment of the profitability of a project.
The next method of assessing financial risks is the use of the breakeven point (TBU). It is worth noting that it is considered a critical point of sales (production), in which the profits from the sale of manufactured marketable products are equal to the costs associated with its manufacture. In other words, the profit in it is zero.
It is worth noting that the use of this financial method for assessing risk analysis involves identifying the maximum production volume. Below, his project will turn into unprofitable. It is known that, when breakeven points are identified, they usually proceed from the equality of income (income) from the sale of a marketable product and the cost of its production.
The initial data for the calculation:
- Unit price of a product.
- The amount of costs that do not depend (or depend to a weak extent) on the volume of the product (this category is called fixed costs).
- Variable costs that per unit of commodity output.
The higher the breakeven point is, the lower the degree of attractiveness corresponds to the project, because to realize its profitability (profitability), the maximum volume of production (sales) should be ensured. It is worth noting that the analysis of the impact of the dynamics of each of the presented indicators on the TBU implies an assessment of the sensitivity (in other words, the degree of risk) of the project to actual or possible changes.
Cost-effectiveness and financial soundness analysis
The most important method for assessing financial risks in managing financial risks is the analysis of financial stability, as well as the appropriateness of expenses. You should be aware that in the economy under the stability it is necessary to understand the ability of a particular economic system, regardless of the circumstances, to maintain its own performance, that is, even after the influence of adverse environmental factors on it.
Through the methodology of stability analysis, a change is identified in the key economic values of the project in the event of adverse changes in terms of various factors. For example, the indicator of possible profit is studied after a change in prices for materials and raw materials, which is necessary for the production of marketable products. This method is considered a good illustration of the impact of the source factors on the final result of the project.
Its main drawback is that the change in a single factor is considered in an isolated manner, while in practice all factors of the economic plan are somewhat correlated. Therefore, the use of this method as an independent tool for risk analysis is very limited.
In the process of analyzing methods for quantifying financial risks, it should be noted that the financial stability (condition) of a commercial structure is considered a complex concept characterized by a system of relative and absolute indicators that reflect the presence, use and placement of financial resources of the company and together determine the stability of the firm's economic position and its reliability as a business partner.
When assessing the degree of economic risk in the system of indicators that characterize the financial condition of the company, special interest can be shown in solvency indicators. It is advisable to consider this category as the readiness of the company to repay debts in the event of claims from all creditors at the same time, but only for short-term obligations (the fact is that for the long-term repayment period is known in advance). The use of solvency indicators implies the ability to assess the readiness of a company to pay creditors at the current time on priority payments exclusively by its own funds.
It is worth noting that one of the most affordable methods of risk assessment for a businessman in relative terms is the use of financial stability ratios. They are considered the most important tools that are widely used to quantify economic risks. Odds are determined in the process of analyzing the financial condition of the company. So, the key indicator of solvency is the liquidity ratio. Liquidity should be considered as the ability of a commercial structure to use assets as a direct means of payment or to instantly turn them into money to pay off debt in a timely manner.
Final part
So, we examined the classification and main features of financial risk assessment methods. It should be noted that in order to make competent decisions, real quantitative characteristics of risk and reliability are necessary, and not their imitation. So, they must have clear content. These features can only be probabilities. It is worth emphasizing that both subjective and objective probability can be used to make decisions. The latter can be calculated on the basis of indicators of statistical and accounting reporting.
Some methods are specific in nature. For example, in the process of applying the analogy method, some caution must be exercised. Even in the most famous cases of project termination in an unsuccessful way, it is difficult to form the prerequisites for the purposes of future analysis, respectively, and to prepare a real set of scenarios of possible disruptions.
In addition to quantitative, to date, quite widely used qualitative methods for assessing financial risks. , , . , , , ( , ). , , , . . , .