A mathematical model of company revenue amid demand uncertainty

Abstract

The study of volatility is one of the topical areas within the field of econometrics. In this study we focus on an enterprise operating in conditions of economic uncertainty, for which we propose a stochastic revenue model based on the reverting process. Such a model has an advantage over models based on geometric Brownian motion, correctly conveying the temporal dynamics of the standard deviation of the logarithm of the revenue growth rate. The accuracy of the model is confirmed by empirical data presented in this work. Stochastic constants are interpreted from the point of view of financial management, giving an opportunity to take a fresh look at the objectives associated with the management of the operating activities of an enterprise. It is shown that the reverting revenue model (as an instrument of current planning) in combination with the concept of sustainable growth (as an integral part of strategic planning) provide a good basis for developing an enterprise management technique under conditions of uncertainty of demand. This study provides equations for calculations of the numerical characteristics of a reverting process that facilitate the operational planning procedure. In this respect, obtained results can be considered as a contribution to the theory of financial management of an enterprise, which is still largely based on the concept of the deterministic nature of demand for goods and services.