Implementing Risk Assessment Analysis Over Deterministic Analysis

The Future Of Forecasting

Consider the case of a company that has experienced six months of cash flows this year and wants to forecast the next six months. The usual way to do this is to predict a cash flow growth rate – expected, high and low and to base the analysis on these choices. However with economic volatility and market shifts, reality can be quite different. Therefore, rather than using a
deterministic analysis, at NIIT, we are increasingly using risk assessment based analysis wherein  a large number of scenarios are prepared to better understand risk interactions,  business linkages taking care to model latest product prices, product demand, expected order book, interest rates and exchange rates and taxes appropriately.

"The usual way to do forecasting is to predica cash flow growth rate – expected, high
and low and to base the analysis on these choices"

Though forecasting can be done at and aggregate level, it is important to break down the various components of income statement and cash flow into smaller components details such as prices of each product, inputs, order book by practice and products, people movement, variable and fixed cost elements, estimated capital and marketing expenditure and any non-recurring or exceptional income or expense. The benefit of breaking down the income
statement is that we can find much more information on market driven prices and rates.

Modelling Risk

Risk analysis needs to spend considerable time and effort to correctly model the risk of inputs and inter-linkages. An example of risk analysis done in our company while preparing forecast is given below:


To Sum Up

Once all drivers of income statement and cash flows have been estimated and modeled, they are compiled into a standard income and cash flow statement. This exercise is done every quarter for best results and for improving forecasting and comparing forecast to the actuals. Like any other type of analysis, poor assumptions leads to poor conclusions. Therefore, it is  important to validate all assumptions and the interactions between them.