{ "media_type": "text", "post_content": "Hey geniuses, financial modelling question: how do you account for the risk of fines in an excel business case model? For example if your project would eliminate a 10% risk each year of being fined $1m. Do I model it as a $1m P&L benefit a year? $100k? Something else? Thanks!", "post_id": "614c77a7cd5461002b14f3c4", "reply_count": 5, "vote_count": 2, "bowl_id": "5a56f68d15f6ef0013aad256", "bowl_name": "Excel Genius" }

Hey geniuses, financial modelling question: how do you account for the risk of fines in an excel business case model? For example if your project would eliminate a 10% risk each year of being fined $1m. Do I model it as a $1m P&L benefit a year? $100k? Something else? Thanks!

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(Probability of being fined $1m * $1m) - ((P[fined $1m] - 10%) * $1m) = expected benefit of implementing solution relative to baseline expectation

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If your project has a 100% chance of eliminating 10% risk of being fined $1m, then yes 100k benefit. This would make sense if your whole model is meant just to improve fines. But if this is just a potential side benefit, then I’d factor in the likelihood of the reduction as well (for example: 75% chance of reducing 10% of fines would net you a 75k benefit on average instead of $100k)

Are all years independent from each other? If yes, $100k per year. If not (e.g., without the project, if you get fined in year 1 you’re much less likely to get fined in year 2) then the benefit of the project is no longer $100 per year.

Right AP1, if you’re projecting and discounting it back then you could measure the delta on company value instead of a per annum basis. 100k in a single period of a dcf might not be a compelling business case though.

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