Assumptions in risk management.
CPA Umeme Steve
Internal Audit Manager | Head of Internal Audit | Compliance Manager | Risk Management Specialist | Board Member | Financial and Operations Auditor | CISA | CFIP | CPAK
In business, when we make a decision, we normally make a number of?assumptions?about what we expect might happen. Usually, if a big business decision is framed as a question of risk, entrepreneurs tend to be more risk-averse. But when the same decision is framed as a question of opportunity, they tend to be bolder.
?Taking the right risk;
?Anticipating what might happen, evaluating and assessing it, then taking appropriate actions through informed and intelligent decisions, leads organizations to success. This is effective risk management. It helps entrepreneurs take the right risks, considering both upsides and downsides, to achieve enterprise objectives.
?An assumption is made when you state that you think this or that will or will not happen. If you are smart, you define what event or situation that is, how it could affect your objective and your assessment of its likelihood. In other words, you are assessing a risk (if adverse) or opportunity (if favourable).
?A forecast is also an assumption or at least based on a set of assumptions about what is expected to happen. What we should do with assumptions is?monitor them. However, not all assumptions are equal. There are some that are incidental and some that are critical.
?Critical assumptions are those that, should they not bear out, your objective will probably not be achieved.
Otherwise, the rest are often documented as incidental assumptions because the desired outcome is not dependent on them.
?Managing risk:
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?Monitor the critical assumptions and be prepared to respond at the first indication that they will not hold up. If you want, you can refer to this as the monitoring of key risk indicators (KRI).
But, normally, KRI refers to things that might happen to hurt you, and you should also be monitoring for things that might help you.
?Example;
?If the assumption is that a new product will be ready for market on July 1st, you need to be prepared to take action not only if the readiness is delayed but also if it is early!
?Understanding assumptions that have been identified as critical to achieving an objective is essential to effectively managing risk and for business success.
?Is this how you approach your business decisions?
You are what you risk!
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1 年Simple and well explained
An experienced accountant spanning 12 years dealing with cash management, taxation, budgeting, asset management etc
2 年interesting read