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  • Writer's pictureWilliam Webster

Forward looking risk

The regulator is encouraging firms to become more proactive at looking at forward looking risk. Is that a good thing? It is not a panacea and its role should be put into context. Using your projections it to see what planned growth does to planned liquidity and capital is helpful. It shows up over extension before it happens and it may prevent failure. In this respect looking forward is a helpful way of reassessing the merits of your plans. However if the best brains at the Bank of England can't accurately predict the forward inflation rate what hope is there for mere mortals getting their projections right? The increased level of economic uncertainty means that having faith in any plan beyond a one year horizon must be described as folly and it is here that the problem arises. There is a danger that if all the forward indicators are green there's no need to look any further. If they are red there's the temptation to disregard them. After all, things are out of your control and surely it will all come back on track further down the road. Does this sound familiar? The fact is looking forwards is helpful but its use tails off at an exponential rate as you go out in time. It would be a pity if forward looking risk inadvertently makes us forget that managing a business requires that you have the ability to respond to changing events - many of which are completely unpredictable today let alone tomorrow - as they unfold.

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