A recent Risk Angles issue from Deloitte,
Five Questions on Risk-adjusted Forecasting and Planning, caught my eye as I have been a strong advocate of such methods for many years.
The principle is that every forecast or business plan is uncertain. When a CFO presents the latest forecast for the year or quarter, he will typically provide a single number for each line in the forecast, from revenue to the bottom line. But this is his selected projection (a best guess) from among a range of options. If asked, he may say that he is 79%-80% confident in the forecast, but that is based on estimates and assumptions.
Risk-adjusted forecasting and planning recognizes that there is a range of possible results. Not only are there estimates, which may be clearly expressed as such, but assumptions are made. If an organization is to optimize performance, it needs to understand this uncertainty, factor it into the forecast, and take action to increase the likelihood of positive events (such as a potential sale being realized) and minimize the likelihood of negative events (such as delays in a supplier’s delivery of critical components).
The Deloitte perspective is focused on understanding the risks that might affect future performance and factoring that into the projection. Understanding the risks and factoring them into the plan should improve its accuracy (the likelihood of it being correct), and demonstrate to the board and the organization’s executive leadership an appreciation of risks to performance. Deloitte suggests presenting the forecast as a range of potential outcomes, each with an estimated likelihood of occurring.
The Risk Angles piece is a start and more can be found in other pieces from Deloitte:
While this is good, it doesn’t go far enough for me. I believe that understanding the risks and the how they affect the likelihood of different outcomes is a start. But the key is taking action to improve the likelihood of and potential effect of positive events and minimize the likelihood and effect of negative events.
If I were CFO, I would present the risk-adjusted forecast as a range of potential outcomes, with estimated likelihood, and the actions that are necessary to optimize the results.
As CRO, I would seek to help the CFO in this initiative. I welcome your views and comments.