Blog And Articles

Financial Modeling of a Production Process

A production process is an economic process for converting inputs (raw materials, labor and other resources) into outputs (goods or services). Financial modeling of a production process helps illuminate the decisions regarding the process such as key dates, timing, capital asset purchases, and build or buy decisions. To illustrate, this article takes a closer look at a wine production process including growing grapes, crushing, blending, aging, bottling and packaging.

Correcting Rounding Errors

In February, 2013, the patent office issued patent #8370226 to Patanjali Bhatt (Intuit) that describes a technique for correcting rounding errors. The example shown in the patent is:

Seeking a Better Goal Seek

Goal seek in the context of financial modeling is a simple analysis to answer a question of the form.

What value should X be to make Y equal to V?

Both X and Y are variables of the financial model and V is some constant. Break even analysis is a simple example of a goal seek problem and has the form:

What value should X be to make the net income equal to zero?

Believe it or not, Goal Seek can be realized as the solution to a circular reference. But don't try this in Excel; it doesn't work because of Excel's flawed iterative calculations.

Price Elasticity Models and Optimization

Price elasticity refers to the property that the price of an object will influence the number of units sold. In general, higher prices mean fewer sales, and lower prices mean more sales. If you chart price and units sold, you can draw a line with a negative slope to show the relationship. The revenue can also be plotted and shows a curve. If you set the price too low or too high, you won't have much revenue, but if you price it just right, you'll do fine. Optimization is a method to find the best price to maximize profit.

Static Vs Dynamic Cubes

A cube is a multidimensional hierarchical data organization that underpins OLAP (Online Analytical Processing) and many other financial software tools. Cubes provide a fast way to analyze data and generate reports. A static cube is one in which the cube is created up front by computing all (or most) values and storing them in one static data structure. Any change or update must either recompute the cube from scratch or use sophisticated techniques to minimize the computational cost of updating the static cube.