5. Decision making and an introduction to surprise via Bayes
How Do You Anticipate Surprises?
Should’ve, would’ve, could’ve, might’ve! These are words that might be heard in a board room during a post-mortem on a flawed decision. Executives berating themselves for failing to consider all the possible alternatives.
They did their SWOT analysis. They engaged in a collaborative way and sought input from all levels of the organization. Yet, their final decision was flawed. There was a surprise that they failed to consider. How could they have contemplated that surprise or, for that matter, the likelihood of any surprise?
More than 250 years ago the Reverend Thomas Bayes first provided an equation that allows new evidence to update beliefs in his An Essay towards solving a Problem in the Doctrine of Chances (1763).
Let’s examine how the surprise could have been anticipated using Bayesian theorem.
4. Metrics Meet Monte Carlo
Is A GAAP Income Statement the Best Way to Manage Your Business?
Clearly GAAP statements are an important and necessary part of reporting for regulatory bodies (the SEC) as well as stockholders. But are they the best way to manage your business? I submit that there may be alternative presentations of both the statements themselves as well as the metrics which may be derived therefrom which may be more useful and provide managers with different insights. This article will examine whether a Direct-Basis Income Statement and attendant metrics might just offer another approach.
3. Dispelling the Myth That My Company Is Too Small For Risk Modeling
Can My Company Withstand The Fallout From A Bad Decision?
I can’t tell you how many times I have heard a prospective client say – my company is too small for risk modeling. You see it typically goes against the mindset of the entrepreneur to think in negative terms.
It is not my intent to stifle the competitive nature of the small business entrepreneur. It is, rather, to inform him that there are tools which may be utilized to protect him from bad outcomes or at least educate him as to the degree of his potential risk or reward.
Most likely, the small business entrepreneur does not have the capital structure to insulate him from a bad decision. For that very reason, he’s exactly the right sized company to engage in risk modeling.
2. A Most (Un)Likely Case Scenario
There is turmoil at The Osborne Company! Management can’t get together on their Strategic Plan for next year. Marketing believes that unit volume will be at a certain level; manufacturing says that marketing’s forecast is too high; and the CEO, who marches to a different drummer, has yet an even higher level of volume. Take into consideration that certain elements of raw material will have to be outsourced at potentially different prices depending upon supplier availability and throw in that there may be an increase in the minimum wage. Oh, and by the way, a mandatory debt repayment is required.
Amid this turmoil, the CFO has been asked to create the Most Likely Case Scenario. Sound familiar? Let’s see how he handles it?
1. Navigating Through Uncertain Times
When has a strategy that you have undertaken followed the precise path that you pictured when you laid out that strategy? The answer is probably never. Why? Because life is happening. Because actions and inactions, taken or not taken, by customers, competitors, governments, regulators, etc are occurring simultaneously.
The weather forecasting community introduced us to the term – the cone of uncertainty – as they attempt to predict the path of a storm. I submit that a company’s strategy can also be projected with its own cone of uncertainty.