If we receive information which doesn’t help us make decisions to reduce our risks,
we should ignore it.
Any information appearing on our screens and in our in-trays should be judged against
4.1.2 Historical information and forecasts
Decisions cannot change the past, only the future. Thus information used to assist
in decision making should look to the future. The past is only useful to predict
the future. Yet how much time is spent, by managers and their accountants, looking
at historical data when they can’t change it?
This is not really surprising, since risks can only affect the future. It’s a bit
too late to worry about risks in the past hindering our objectives (it rained so
I got wet)!
Yet how much time is spent looking at information that looks forward and attempts
to predict the future, and therefore reduce our risks? A lot less than is spent on
If one of our objectives is to ensure the continued existence of our organisation,
by reducing its risks, we need to make decisions which affect its future.
To make decisions which minimise risks, we need information that predicts the future.
This information not only consists of forecasts of future profitability but competitors’
press releases and web sites, news in trade journals and papers, attendance at exhibitions.
Any information which gives us an indication of those forces which will affect our
future needs to be identified and factored into our accounting forecasts.
Forecasts are not budgets or expected ‘actuals’ against budgets, these figures are
usually targets and therefore based on hope, as opposed to reality.
Forecasts should be a realistic attempt to predict the future results, within a stated
accuracy. Accountants’ efforts should be directed at getting forecasts as accurate
as possible and explaining differences from the actual results.
Forecasts will never be accurate but the attempt to get good forecasts will provide
information about the factors which influence the organisation’s performance.
We have clearly established that the management of risks is linked to the management
The identification of risks will also help us focus on the future, since past risks
are not relevant. In this context, the use of risk modelling software, such as @RISK
4.1.4 Information requested from others
We need to tell our information providers: our objectives, the risks likely to hinder
them and the related decisions.
Information providers can then tailor the information they provide to our requirements.
This saves their time and ours.
4.2.1 Realistic accuracy
We must take accuracy into account when providing and requesting information.
We shouldn’t expect any information provided to us, or by us, to be greater than
we can reasonably measure or estimate. Thus, if we are asked for a forecast of sales
in three years’ time, our answer should be in the form £100 ± 30m. The degree of
accuracy we can provide will depend on the past data we have and our confidence in
the assumptions we have to make.
Yet an accountant may be happy to quote a profit figure like £124,675. But for various
reasons, such as difficulty in valuing stock and debtors, the realistic answer is
more likely to be £125,000 ± 3,000 i.e. between £122,000 and £128,000.
Why is providing information to an unrealistic accuracy harmful? Because it implies
that it can be determined to that accuracy and thus implies it must be correct (remember
the Google figure of £66.59 for fuel?). Which of the profit figures quoted above
would we trust? The first one probably, because it gives an impression of accuracy,
while the second one gives the impression of uncertainty, since anyone quoting profit
in a £6000 range isn’t confident. However, the reverse is true; the second figure
is the more trustworthy, since it gives an accurate impression of the uncertainty
of the number. Try selling that explanation to a Managing Director!
4.2.2 Start with the most accurate figures
Some decisions may involve information of varying accuracies. Supposing we want
to set up a restaurant and we need to work out whether, in ten years, we will have
any cash in the bank. The conventional way is to try and estimate the sales, subtract
the costs and see if there is any left over. The problem with this method is that
the range of possible sales figures is very wide, after subtracting the costs we
may be left with a range of answers from being bankrupt to rolling in money.
However, start from the figures we know most accurately – the cost of renting and
fitting out the premises. We can reasonably estimate the profit to be made from
the average meal and can then work out how many diners are required to cover our
labour and premises costs. If the answer exceeds the capacity of the restaurant,
or requires us to open 20 hours a day, we know we need to rethink.
By using this method, we have to make fewer guesses and those we do have to make
are based on reasonable assumptions.