Why Risk and Uncertainty Matters.
Let me give you a very topical example, the hidden risk and uncertainty in your cashflow.
Let’s suppose you have a very simple business with just 4 customers and 3 categories of expenses, your customers have historically paid you within 90 days and your bad debt rate runs at just 1% of sales. How could there be any uncertainty in planning your cashflow for such a simple small business?
Based on your Excel cashflow model you forecast that the year’s net cashflow will begin in January at £0 then rise steadily throughout the year with February at £220, March at £330 followed by the remaining 9 months from April at £366 per month. The numbers are purely illustrative, so you can (and should) add as many zeros to them as you need for them to make sense in the context of your business.
Because you have a well run and cautious business you decide to derive low, medium and high net cashflow estimates, just so that you and your bank don’t get any surprises.
Your cashflow forecast looks pretty good, as below, and you feel safe to take on the next year’s trading with confidence despite the climate of economic and business uncertainty:
What you cashflow model is hiding from you are the implicit risks and uncertainties that you have not deliberately chosen to ignore but which you don’t have the tools to assess.
Here’s what might happen to your cashflow:
- If the bad debt provision is too low due to your customers being hit by globally bad trading conditions.
- If your customers are forced to take a few extra days “suppliers credit” because they, in turn, are short of cashflow.
- If your sales orders are lower or delayed because your customers are delaying purchases.
- Etc, etc, etc……
These possibilities are not “inventions”, the evidence is contained within the numbers of your spreadsheet and which look, at first sight, so reassuring.
What this cashflow forecast is hiding is that there is a realistic chance that:
- In some months, your monthly cashflow could be as low as 138% below target: - £120 against a plan of £264.
- Your maximum monthly cashflow could be as high as 329% over target: £870 against a plan of £264.
- Your risk of having a net negative cashflow in any one month is as high as 47%: a much less stable cashflow stream than the plan indicates. Looked at differently that means your cashflow could be negative for 5 months of the year.
You’ll find similar hidden risk and uncertainty in all your budgets, your sales and marketing plans and your project plans, in fact in every part of your business. The absolute extremes probably won’t be reached but actual against plan variance will certainly be higher than your plan indicates and, for even the extreme values, we can calculate a probability of them occurring.
The good news is that there are some very effective ways to tame risk and uncertainty and, with the right approach, controlling your exposure can be both quick and very cost-effective. The difference you will find by using these tools is that your business decisions will become more of a rational calculation of risk and less of a blind gamble that risk and uncertainty won’t strike.
On this site you’ll find background information to help you to orientate yourself in the strange world of risk and uncertainty, some explanations of the concepts underlying the tools used to reduce risk and uncertainty and, if you become fascinated by the subject, a resources section where you can dig deeper. You’ll also find, in the Get Help section, a presentation of what we can do to help you cost-effectively tame risk and uncertainty in your business.




