Credit Risk Strategy

  

 
 

An earlier article in this category constructed the profit model as an equation.  However, in certain circumstances, it is also possible to use a diagram to achieve the same goal.    

A diagrammatic profit model is a useful communications tool when the intended audience is non-technical and may feel uneasy with equations.  On the down side, although a diagram can highlight the interactions between profit models it can’t easily show the size of each interaction.  This means that it doesn’t facilitate accurate calculations in the same way that an equation would.    

In practice, therefore, the two formats compliment each other.  As a piece of analysis progresses though its life-cycle, the dominant format of the profit model will change.  

Usually, an analyst’s first step would be to draw a draft profit model in diagrammatic form.  This helps the analyst to identify the key profit levers and the…

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