How can you identify financial risks in a program?

?? Don't Wait for Financial Pitfalls; Anticipate Them! I'd stress the critical nature of early identification and proactive management of financial risks in any program. Begin with a clear understanding of the program context, setting the stage for comprehensive risk identification. Dig deep into potential sources, categorizing them effectively. It's crucial to quantify risks, ranking them by potential fallout. Lastly, arm yourself with mitigation strategies and contingency plans, preparing for eventualities. This structured approach equips program managers with the insights and tools needed to navigate financial uncertainties with confidence.

One of the major tasks of the program manager is to analyze and understand the program scope and boundaries and the players involved. By understanding every component needed it is easier to understand the possible financial risks that exist in the program and you will be able to anticipate and prevent such issues

Financial Audits: Regularly conduct financial audits to ensure compliance with budgetary constraints and financial controls. This can help unearth any discrepancies or anomalies. Scenario Analysis: Develop and assess various financial scenarios. What if a major resource suddenly becomes unavailable? How will it impact the budget? Preparing for these "what-if" scenarios can help in identifying potential risks.

Contingency Planning: Develop contingency plans for potential financial risks. What if a key supplier goes out of business, or a regulatory change increases costs? Having a plan in place to mitigate such risks is crucial. Key Performance Indicators (KPIs): Define and monitor financial KPIs, such as earned value, cost performance index (CPI), and schedule performance index (SPI). These metrics will help you track the program's financial health and identify deviations from the plan.

In my experience Identifying financial risk in a program involves assessing factors like budget overruns, market fluctuations, and unforeseen expenses. Conducting thorough financial analyses, stress testing budgets, and monitoring economic conditions are key steps in identifying and managing financial risks.

In my experience, how the risk description is written is key to narrowing down the specific problem that needs to be solved. Below is a simple format for a concise risk description: If <insert the driving problem you are trying to mitigate> by <insert date to time bound when the problem needs to be resolved> due to <insert root cause>, then <insert financial implication> Example: If we do not deliver the system to our customer by 03/10/2024 due to supply chain schedule slips, then we will not receive our milestone based payment causing us to miss our 1Q financial forecast. I have found that the more specific you are in identifying the cause of the risk, the more focussed and executable the risk mitigations and contingency plans can be.

1. Scope Creep: Uncontrolled expansion or changes in the project's scope can lead to increased costs. 2. Resource Constraints: Insufficient resources or skills could delay the project, resulting in increased expenditures. 3. Vendor or Supplier Risks: Reliance on external parties might involve potential cost changes, delays, or quality issues. 4. Regulatory Changes: Shifts in regulations or compliance requirements may necessitate costly modifications. 5. Financial Controls: Weak financial controls, inadequate monitoring, or poor financial reporting systems can lead to financial risks going unnoticed.

As Einstein is quoted, spend 90% of the time focusing on the problem and solution and 10% on the execution. Until you understand the PESTLE elements (or SWOT for that matter), you are simply guessing. The best way to combat risk is to spend time with gap analysis, scenarios, and stress testing to better understand the risk to effectively implement the necessary controls. As a business unit risk Director, I invested resources in understanding risk origins and only then structuring effective mitigation strategies to ensure our residual risk where well within tolerances. The result was a more informed and targeted risk strategy.

There are some really good questions that you can ask the client, the team, and even SME's to try and ferret out financial risks, such as: - Have we ever done a project like this before (as an org, as a team, etc.) If not, then all your cost estimates are likely light and a source of financial risk - Do we understand the tools, technologies, and other inputs that we are going to be using on this project? If not, then you are will run into cost problems as you work with them and they become a source of financial risk - Do the client and the project team understand the payback schedule? Client may be planning returns on the project starting in month 12 of a 36mth project, and you run into delays, you may have more risk that you think

Market risk ,Liquidity risk, Credit risk, Operational risk, Legal risk, Quantitative analysis looks at a company’s historical performance, helping you predict the likely rate of return. Technical analysis is used to weigh different securities using historical returns, share prices, trade volume, and other fiscal data. Fundamental analysis assigns value to any security by looking at a combination of assets and earnings. Hedging techniques reduce exposure to risk when investing in any security. Unfortunately, some types of financial risk – like market volatility and natural disasters – can be difficult if not impossible to fully plan for.

Impact & Probability is commonly used to determine risk, financial risk included. However, consider adding another two more perspectives, Proximity and Detectability. Proximity looks at how fast this risk is going to hit the program and Detectability looks at how easy it is to know that it is occurring. Financial risk deals with cash flow and knowing how much time one has helps to manage the risk in a tangible way.

what-if analysis involves exploring the impact of specific changes on financial outcomes. It allows for the examination of best-case and worst-case scenarios by modifying input variables. For instance, a startup can conduct what-if analyses to evaluate the financial impact of different pricing strategies, changes in market demand, or variations in production costs. By adjusting parameters, such as sales volume, pricing, or cost assumptions, the startup can assess the sensitivity of financial projections and understand potential risks and opportunities.

To analyze the impact and probability of financial risk in program management, start by assessing the potential consequences (impact) and the likelihood of those consequences occurring (probability). Use historical data, expert opinions, and modeling to estimate these factors. By combining impact and probability assessments, you can prioritize risks, focusing on those with the highest potential impact and likelihood. This approach helps in effective risk management and resource allocation within the program.

I use run rate analysis as an indicator of both financial risk and program health. The obvious red flag is if we are spending over our planned run rate without knocking down our deliverables. For this trigger I review labor costs I consider if our scope estimates were off, or if our human resources have the skills and experience needed. If we are behind in our spending, is our hiring and onboarding delayed, is ours schedule at risk. In my industry, ~80% of program costs is labor, so focusing on those risks proves most effective.

To identify triggers and indicators of financial risks in program management, pay attention to key signs like budget deviations, unexpected cost increases, cash flow issues, and delays in funding sources. These are the triggers or early warning signals that financial risks may be emerging. By closely monitoring these indicators, you can spot potential problems and take proactive measures to mitigate or manage financial risks within the program.

Using the network diagram to assess financial risk triggers is also a helpful tool. Any place that your network has multiple dependencies in the flow - you need setup an indicator just to be sure you are checking that no financial risk is present at that choke point.

One thing I have found helpful is the use of a risk register and a regular risk audit. Every risk impacts the cost of a program directly or indirectly- the biggest and most common contributor being schedule slippage. As a program leader, I would not limit myself to assessing program cost impact only. Assess the impact to the loss of revenue and ROI to provide a holistic impact to your stakeholder.

One way to identify financial risks is by conducting a thorough analysis of the program's budget and financial statements. This involves examining the revenue sources, cost estimates, and financial projections to identify any potential gaps or discrepancies. Additionally, performing a risk assessment specific to financial aspects can help uncover risks such as budget overruns, unexpected expenses, or revenue shortfalls. It is also important to consider external factors that may impact financial stability, such as market volatility, regulatory changes, or economic downturns. Engaging with financial experts or conducting external audits can provide valuable insights into potential financial risks.

In my experience, a significant part of the risks, including financial risks, comes from invalidated assumptions. Quite often, at the Scoping/budgeting stage, many unknowns and/or unclear dependencies are included in the Assumptions or Exclusions sections that might be overlooked or insufficiently validated. Further down the line, some of those assumptions become invalidated and, therefore, have an adverse impact on timeline/scope/budget/quality.

This may be more specific to construction projects but it could also apply to any industry where an RFP is submitted: Exclusions, exclusions, exclusions... When contractors submit their proposals in response to an RFP, don't just look at what they have included in scope. Pay particular attention to what they have excluded from their scope of work. Is another contractor picking up that scope of work? Do they call out the same exclusion? Any excluded activity presents an opportunity to miss something that may need to be done. I remember having a paving contractor tell our team that repainting the lines was not included in his company's scope. The team had simply assumed it was because that made sense. We were wrong.

There are other fundamental financial risk that the project team need to note, which could be the outcome of an inefficient process. The efficiency of the finance team billing the customer, the payment term of our vendor, payment term of our customer, the customer’s ability to pay, etc. While it might not seems to be as impressive to track these as compared to those external risk event, such adds as the fundamental and could caught the team off guard given the low priority that it’s being given.

Other types of financial risk on a project or program aren't always obvious. The financial health of key vendors, the timing of cash flows out of the project when compared to the cash needs of the client, and payment timing for long lead time inputs are all things that can break a project if not considered. The analysis may be quick, but it needs to be done. You don't want a critical vendor going bust in the middle of your project - or to be asking the financial controls people at the client to make payment on an input with a long lead time that will span the FYE or a tight cash period.

Key steps to consider - 1. Financial Objectives and Planning - Define clear financial objectives - Review the budget for alignment - Analyze revenue sources and stability - Assess cost variability and sensitivity - Scrutinize funding sources and terms 2. Financial Health Analysis - Review financial documents for consistency - Calculate cash flow projections and gaps - Assess debt levels and terms 3. Market and External Risks - Analyze credit and counterparty risks - Evaluate legal and regulatory compliance 4. Risk Mitigation and Reporting - Prioritize risks based on impact and likelihood - Establish regular risk reporting 5. Continuous Monitoring and Adaptation - Continuously monitor financial performance