Integrated valuation and risk modeling (IVRM) is important for analyzing potential compromises between value and risk at your organization. However, certain IVRM mistakes can call into question the IVRM efforts at your organization.
The following are six IVRM mistakes you need to avoid at your organization to maximize the effectiveness and success of your IVRM efforts.
Making projections that aren't realistic
It's important that the projections you're making for your IVRM efforts are neither too pessimistic nor optimistic. You need to make sure that all the projections you're using are made based on assumptions that are as reasonable and data-driven as possible.
Make sure that projections are made in an unbiased manner and not by any party within your organization that could benefit from either the over or under estimation of any variables.
Using an inappropriate template for your needs
When it comes to financial modeling, you might be forced to use a ready-made template if you have no specialist on staff. Remember that the template you're using should only be considered a starting point in your risk modeling efforts.
Your company is unique. While you may be able to start things with a ready-made template, you definitely don't want to merely plug numbers into a template and consider the results your final product. This could lead to gross inaccuracies in your organization's IVRM analysis efforts.
Calculating with the wrong rate of return
One of the most challenging aspects of IVRM efforts is choosing an accurate rate of return on the investments your organization makes. You need to closely analyze rates of return on similar investments to maximize the realistic nature of the rates you're using.
Hardcoding where it's not appropriate
It can be tempting to hardcode excessively when you're making financial performance projections without adequate financial experience. However, this can lead to issues such as an inability to see the impact various changes and investments your organization makes will have on financial performance.
There are only two factors that you should be hardcoding in your IVRM efforts: cost assumptions and revenue assumptions.
Overlooking the need for an executive summary
You'll make the use of your IVRM efforts far more simple if you also have an executive summary drawn up in addition to your other IVRM efforts. This way, executives who don't have the time to look into all the details of your IVRM analysis can still benefit from the conclusions of your model.
Using multiples that are devised for public companies
If your company has not gone public, then you shouldn't be using multiples that are devised for a public company.
You can easily find multiples out there that have been drawn up for public company scenarios. However, these will generally not be comparable to realistic multiples for companies that have not gone public. Never use public company multiples in IVRM efforts for a company that is privately held.
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