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What are the chances

Adding risk to business decision models can be a delicate process, so taking things a step at a time can save a monumental fall. Matthew Leitch discusses the vital stages.

Adding risk to business decision models can be a delicate process, so taking things a step at a time can save a monumental fall. Matthew Leitch discusses the vital stages.

How do you put risk into business decision models and forecasts? Incrementally, of course. Making a series of small changes makes it easier to get each one right; the occasional mistake does not have catastrophic consequences, and people have time to learn to take advantage of better information. This article explores several potentially useful incremental changes. But first, an obvious start.

The risk register

If your organisation already has some kind of risk register it is natural to wonder if this can be used in some way to add risk into business models.

Unfortunately, the design of most risk registers means that this material nis unsuitable. Many risks on risk registers are causally related to other risks and so their estimated impact includes indirect impacts through other risks. As a result some impact is counted more than once, overstating the overall risk.

At the same time, typical ratings of risks by choosing a probability level and an impact level can drastically understate the uncertainty and risk involved because the possibility of other levels of impact is ignored.

This is an extract from the Finance & Management Magazine, Issue 236, October 2015.

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