The ultimate goal when integrating risk management into budget planning is to understand the assumptions your budget is based on. Here are some steps you can take to come to that understanding:
1. Identify the major line items of your budget and the personnel who contributed to them
Risk assessing an entire budget may seem like a daunting task, but the best course of action when addressing the risks of any new process is to break it into pieces and tackle those with the highest potential impact.
Fortunately, a budget is already broken down nicely into line items. Now all that’s left to do is use risk assessments to determine which items are most critical.
A risk assessment with a common scoring criterion will help you compare and prioritize line items by which ones would have the highest impact on your company’s objectives.
Then, find out why line items are what they are. Who contributed to these numbers, how did they arrive at this number, and who is responsible for executing the objective on time and on budget? Is this number based on historical performance? Is it based on new laws, regulations, or operational changes?
You probably won’t know the assumptions that led to every line item you’re interested in. The only way to get the information you need is to engage key personnel associated with each estimate. The beauty of enterprise risk management is that it’s cross-functional in nature and can help you bridge the gaps between departments to get accurate data.
2. Ask key personnel to provide insight on major line items
Let’s use an example here. There are two different budgets. One pertains to expanding an existing product or service your company has performed for the past 20 years. Another pertains to a new product for an existing segment of your customer base.
The line items for the 20-year-old product or service may be historically based, but perhaps misses the complexities related to the expansion.
And what about the other budget—the brand new product? What assumptions were made in this case?
What you’re after here is whether or not all the risks have been identified and how confident the team is in the assumptions they’ve made.
A great way to obtain this insight is to have these personnel perform risk assessments that ultimately answer questions like these:
- What are the potential risks that could interfere with the accuracy of this estimation?
- What is the likelihood of these risks materializing?
- What would the impact on the company be if they did materialize?
3. Engage subject matter experts to adjust low confidence line items
Get more information—It’s a hackneyed phrase, but it couldn’t be a more worthwhile venture. Let’s use another example. A major line item in everyone’s budget is taxes. This will also be, in most cases, a very low confidence line item since the tax bill recently underwent a major overhaul.
The new tax bill is large, complex, and at this point, not very well understood. The big headline is that corporations will benefit from a huge tax cut. But the devil is in the details. No company is safe making that assumption. Company’s need to understand how the tax bill will affect them specifically.
The way to get more information, no matter what the line item pertains to, is to engage subject matter experts within and outside your company. Determine the questions you need answered to up the confidence level of critical line items and find the people who can give you the answers.
4. Mitigate the risks in your budgeting
Once you’ve collected all the information you can on critical line items, assessed the risks, and are as confident in your forecasting as you can be, you can continue to drastically improve the company budget with mitigation activities for each of the risks identified.
For instance, if a line item has a high risk score, you can ward against potential fallout. You can also have contingency plans in place far in advance of a risk event occurring.
You may even conclude, based on the risk assessment, that the budget needs to be adjusted to account for the risk-reward tradeoff you’ve uncovered. This is particularly important when looking at line items based on low confidence assumptions.
Overall, assessing and documenting the risks in budgeting will put every professional involved at ease. Months down the road, no one wants to be put in a position of scrambling to justify their forecasting after it’s gone south.
5. Continuously monitor risks and efficacy of controls
After you’ve taken steps 1 through 4 don’t stop there! A budget is a living document, constantly affected by changes within the company, fluctuations in the market, or even natural disaster.
To ensure your budgeting is on the money, you’ll need to implement a system for looking out for changes to the risks you’ve identified, and for collecting metrics to prove the effectiveness of the controls you’ve implemented.
Tying risk management to budget planning has many benefits. Acting on these 5 steps will help you solidify a more accurate forecast, be more agile and responsive to changes in the months to come, and enable you to have a better relationship with your managers and peers, ensuring a favorable experience at performance review time!