Reducing Budget Risk By Using Probabilities

This paper emphasises the importance of budgeting for a family run firm. It concentrates on the inadequacy of the typical
budget forecast that is shown to firm owners and lenders. This original budget is changed to a useful indicator of the firm’s
future by incorporating risk, using probabilities and a decision tree. Without this incorporation the firm can misallocate its
anticipated net income between family salary, firm re-investment and debt reduction. The final budget, adjusted to the
individual firm’s risk calculations, produces a weighted net income. This number is a more realistic one for allocating salary,
investment and principal.

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Author(s): van Blokland, Prof. P.J.


Organizations(s): University of Florida