The main goals that we set for ourselves:
1. Improving the control and achievability of financial goals.
2. Reducing the negative impact of risks on KPIs.
Business planning function audit identified the following opportunities:
1. Risk analysis should be linked to current goals, synchronized with the budgetary process. The risk assessment should allow assessing the impact on target KPIs.
2. When setting goals, it is necessary to take into account an extended number of significant risk factors, not limited by range of previously fixed risks.
3. The management incentive system must fully comply with current business goals. Information on key risks and activities should be taken into account when forming motivational KPIs.
The source for increasing efficiency was the budgeting methodology, which was initially based on the classical approach. Namely:
1. Forecasts were based on univariate estimates and metrics;
2. The sensitivity analysis included a closed list of selected variables;
3. Lack of complex interdependent stress testing techniques.
I have developed and proposed a methodology for risk-based budgeting, which allows:
1. Assess quantitatively the uncertainty in achieving target indicators and the key risks that form this uncertainty;
2. Move from univariate forecasting and sensitivity analysis to multivariate models with forecasting ranges for target KPIs;
3. Conduct stress testing of financial budgets, taking into account risk factors, to obtain the distribution of target KPIs.
This concept also allows you to integrate Planning, Risk Management and Motivation systems. Namely, using integration through the formation of KPIs, including strategic goals and goals of current operational efficiency, taking into account the necessary cascading of goals, assessing key risks impact, risk appetite and responsibility for achieving key KPIs, interconnection with motivational KPIs, and subsequent monitoring and control. Risk analysis provides a quantitative understanding of which factors are most affecting revenues and profits, and allows evaluating ways to mitigate risks and identifying growth opportunities.
The quantitative assessment model was based on the following tools:
1. Identification of initial uncertainties;
2. Simulation modeling of Monte Carlo taking into account the corresponding distributions of probabilities and correlations;
3. Introduction of basic, significant uncertainties in the financial model.
For these purposes, I proposed to use IT systems for quantitative assessment and modeling of risks: Vose Model Risk or Polisad@Risk.
All of the above will allow, as a result, to build a dynamic forecast of budgetary indicators taking into account risks, which will demonstrate the probabilistic level of key KPIs performance relative to the initial one, as well as the best and worst-case scenarios. Thus, the main actions of management can be directed to key areas of volatility that negatively affect the goals. For example, the items with the greatest profit margins or those that can hold up growth potential.
If you are interested in implementing the risk-based budgeting methodology in your company, then I will be happy to help such projects implementation. Please contact me through my website: http://akonnov.ru/ or through my Telegram channel: https://t.me/biz_in