Monte Carlo simulation is a technique used to understand the impact of risk and uncertainty in prediction and forecasting models. It can be applied in various fields such as finance, engineering, supply chain, and project management, among others. In Google Sheets, you can use Monte Carlo simulations to model different outcomes based on a range of inputs, using random numbers and statistical analysis to predict the probability of various outcomes.
Follow the process below to set up a Google Sheets Monte Carlo simulation.
Decide what you want to simulate. For example, you might simulate the total sales for a lemonade stand over a month, considering factors like days of operation, cups sold per day, and price per cup.
List down the key variables that will affect your simulation outcome. For the lemonade stand, these variables are the number of cups sold per day and the price per cup. For our lemonade stand, these include daily cups sold (50 to 100) and cup price ($1 to $2).
Each variable should have a probability distribution that reflects how you expect the values to vary. In this example, we assume a uniform distribution for both cups sold and price per cup, meaning any value within the specified range is equally likely to occur. This simplifies the process but consider other distributions like normal or binomial for more complex scenarios.
To simulate randomness in Google Sheets, use the =RANDBETWEEN(50, 100) function for the number of cups sold. This generates a random integer within your defined range.
For the price per cup, use =RAND()*(2-1)+1 to create a random decimal between $1 and $2. These formulas generate new values each time the sheet recalculates which mimics the variability in daily sales.
Combine the randomly generated variables to calculate your main outcome, total sales for the day. If "Cups Sold" is in column B and "Price per Cup" is in column C, use the formula =B2*C2 in column D to represent total sales for that day.
To get a broad view of possible outcomes, you need to simulate this scenario multiple times. Copy the formulas down columns B and C for as many days as you're considering (e.g., 30 days for a month). Then drag the total sales formula in column D down the same number of rows.
After generating a month's worth of simulated sales data, use Google Sheets to analyze the results. Functions like =AVERAGE(D2:D31), =MAX(D2:D31), and =MIN(D2:D31) help you understand the average, highest, and lowest sales outcomes.
Review the range and distribution of your simulation outcomes to guide your business decisions. If the results show a high likelihood of meeting or exceeding your sales goals, your current plan may be solid.
However, if there's a significant risk of underperforming, consider what adjustments you could make to improve your chances, such as increasing marketing efforts or adjusting prices.
We hope that you now have a better understanding of how to set up a Monte Carlo Simulation in Google Sheets. If you enjoyed this article, you might also like our article on how to remove whitespace in Google Sheets or our article on how to repeat header rows in Google Sheets.
