Uncertainties and risk are a fact of life in all financial and business planning, and they must be
addressed and accounted for to the extent possible. Financial planning must be able to address
uncertainty for both the anticipated potential events and for the completely unexpected events.
The following are two typical methods used in financial planning to address uncertainty and risk.
1. Contingency provision—plan for a specific known or potential event
o What-if approach—Revise the base plan for a single contingency.
o BEW approach—Prepare plans for three outcomes: best, expected, and worst.
2. General uncertainty provision—plan for multiple unknown and unexpected events
o Sensitivity analysis—This form of analysis varies selected key plan parameters
by percentages or dollars to project the financial impact of a significant incident
without identifying the specific cause. The four major key parameters are price,
sales volume, cost, and capital expenditures.
o Simulation—This approach applies probability and statistical analysis to each
key variable, which in conjunction with sophisticated computerized financial
models can be used to generate a probabilistic range of possible outcomes, based
on thousands of simulation runs.