Using Monte Carlo Simulation for Pro Forma Financial Statements

Abstract

This paper discusses the usefulness of Monte Carlo simulation and the ease in which it can be incorporated into upper-level undergraduate business courses. While this technique is not typically covered in detail in undergraduate business textbooks, the availability of software that can perform Monte Carlo simulation means that it can be easily covered and demonstrated in the classroom. This paper also includes an example problem in which Monte Carlo simulation is used to forecast financial statements and determine additional funds needed (AFN) for a small business. This problem can be used by faculty to demonstrate this technique in the classroom or as a student assignment.