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Making Risk-Adjusted Forecasting Work

Few companies are doing it well. Heres how to get started, and why its worth the effort.

By Nilly Essaides | Updated on May 22, 2014
“Risk-adjusted forecasting” is a new buzzword in financial planning and analysis (FP&A). What, exactly, does it mean? “Risk-adjusted forecasting and planning involves shocking the financial forecasts with major risk drivers in an integrated and flexible manner,” says H-K Bryn, strategic risk partner at Deloitte in the U.K. “The approach allows a more robust and transparent evaluation of volatility and risk within current plans, helping to build a better understanding of the potential upside—and downside—inherent in the future of the business.”

Mark Pellerin, a principal at Oliver Wyman, which conducts an annual risk survey with the Association for Financial Professionals (AFP), puts it another way: “When I think of risk, I think about having a clear understanding and definition of the relationships between the variation in expected outcome and risk factors,” he says. “Risk-adjusted forecasting is coming up with alternative forecasts that have clearly defined relationships with the variables and risks.” It’s not about having a crystal ball, but about achieving a better and more precise definition of the drivers of, and risks to, the organization’s financial performance.

“You cannot get away from uncertainty in the world,” Pellerin says. “No matter how precise the prediction, there’s an extreme level of unpredictability” in the corporate planning process, adds Steve Player, managing partner of the Player Group and program director for the North American arm of the Beyond Budgeting Roundtable (BBRT).

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