4.Risk-/Return-orientedGovernance
5.Summary
Howweplanourlivesand...
Qualityoflife
• Humanbeingsintuitivelythinkandplaninranges.Thereforepersonalgoalsareoftenplannedina specificrange.
• Thusthenextsalaryincreaseshouldbebetween5%and10%,theacquiredrealestateshould generateanannualreturnofaround4%,thedaughterwillgraduatefromuniversityinthenextyear ortwoandthenextmajorvacationwillcostbetweenoneandtwomonth'ssalary.
• Asacertainplannedeventcomescloser(e.g.theweatherforecast),therangebecomesnarrower andthevalueoftheplannedeventsbecomesmorecertain.Theinitialplanninguncertainties disappearastimepasses.
...Howcompaniesplan
Corporatestrategy
• Sales
• EBIT
• CVA Assumptions
• GDP:1,4%
• Inf:5%
• €/$:1,20
OperationalGroup budgeting
• Sales
• EBIT
• CVA
Objectivesofthe businessunits
• Sales
• EBIT
• CVA
Operationalbudgetingofthebusinessunit
• Sales
• EBIT
• CVA
• Theassumptionsandprinciplesofbudgetingareshownasone-dimensionalvalues.
• Uncertaintiesintheassumptionsmadearecategoricallyignored.
• Wemustlearnhowtodealwithuncertaintiesinordertomakeidealdecisions.
Uncertaintyasanelementofcorporateaction
Strategydevelopmentand adjustment
• Theopportunitiesandriskdescribea stateofuncertaintyaboutfuture developments.
• Thehandlingofuncertaintyisthe centraltaskforthecorporate managementofeverycompany.
• Thecoreresponsibilityofcontrollingis
todemonstratethedegreeofuncertainty tothecorporatemanagementand identifythereasonsforthisuncertainty.
• Initially,thesereasonsprovide managementwithin-depthinformation forthedevelopmentofasuitable strategytobeabletoreactto uncertainty.
CurrentTrendsinCorporatePlanning
Today,manylargecompanieshaverecognisedtheneedtorethinkandmanagewitha greaterfocusonrisks,whileothercompanieshavealreadyheadeddownthisroad.
Themajorreasonsforthis:
• Globaleconomicdevelopmentshavedemonstratedhowcomplexandinterlockedthe marketsaroundtheworldhavebecome.
• Theframeworkconditionsforcorporateactionarechangingmoreandmorequickly andtheforecastsareincreasinglypoor.
• Bestpracticecompanieshandleuncertaintythroughplanning(anticipationof opportunitiesandrisks)tomakethebestdecisions.
• Corporateplanningandriskmanagementmaynolongerbeaddressedasisolated solutions,butrathertheymustbeinterlocked.
Onlyintegratedriskmanagementprovidescompleteandreliable
Agradualapproachtoimplementingthetrend
Risk-andreturnorientedgovernance
Eventrisks
Bandwidth
Budgeting
...tomanagethecompanyinarisk-and income-orientedway.
...andintegratingeventrisksinthe planning,...
...thereasonsandrelationshipsbetween planning,opportunitiesandrisksare prepared,...
Scenarioplanning buildingonthescenarioplanningapproach...
Characteristicsofscenarioplanning
Scenarios...
• areillustrationsofthefuture
• donotcomewithprobabilities
• servethedevelopmentofactionalternativesfordifferentstatesofthefuture
• canexplainthefuture
• can provide decision support
Strengthsofscenarioplanning
Prompt identification
Promptdecisionmaking
Identificationofneedforaction
Promptaction
Quickerthanregularplanning,sinceitisconceivedinadvance Quickerthanregularplanning,sincetheimpactshavebeenconceivedinadvance
Countermeasuresforanydevelopmentsalreadycoordinatedwiththemanagementaspart oftheplanningprocess
Measuresonthemiddleandlowermanagementlevelarecommunicatedthroughscenario planning,ifneedbe(dependingonform)
Strengthsofscenarioplanning
Greater transparency
Reduced costs
Greaterqualityoftheplanningthroughtransparencyintheplanningassumptions
Lesstimerequiredfortransparentdecision-makingthankstothepreparationofmeasures inadvance
Lowercostsfromnegativedevelopmentsthroughmeasurespreparedinadvance
Costsandweaknessesofscenarioplanning
Costs Simplestprocedurefortheillustrationofuncertainty
Costdrivers
Weaknesses
• Placewhereinformationisrecorded/Numberofcorporateunitstobeprocessed (Groupcontrolling,decentralizedcontrolling,operatingunits)
• NumberandtypeofKPIsandincomestatementandbalancesheetpositionsforwhich
scenariosarecalculated
• Numberandtypeoftheconsideredcausalrelationships
• Simplicityleadstosingle-valueconsiderationofuncertainty
• Onescenariousuallyresultsfromaproductofmultipleassumptionsandisthusvery unlikely
• Causalrelationshipsareoftenimplied
• Compensatingorstrengtheningeffects(correlation)ofmultipleriskstepsishardto outline
IntroductionofBandwidthBudgeting
Timepointconsideration
Long-termconsideration
TimepointTimepoint
Foralargeamountofmoney,a budgetisprovidedforsomething thathasalowprobabilityof occurring.
Forasimilaramount,abandwidth canbedeterminedwhichcoversa largedegreeofprobability
HowBandwidthBudgetingworks:
Obtaininginformation
Analysisandvalidationofbandwidth andbandwidthreasonsthrough decentralizedcontrolling
Comparisonofthe planning,incl.the bandwidthsandrisk managementonthe centralizedand decentralizedlevelof controlling Integrated report Integrated Group report
Communicationofthebudgetamounts, incl.bandwidthsandbandwidth descriptionstothedecentralized controlling
Riskworld
world
HowBandwidthBudgetingworks: Documentationofbandwidthsandbandwidthreasons
Onthedecentralizedlevel, bandwidthsareenteredfor significantbudgetpositions
Thedecentralizedpartiesresponsiblefor planningprovidethereasonsforpositive andnegativebandwidthdeviations
Revenue18,20017,70019,000 Mergerofcompetitorsand thuspricewar Insolvencyofcompetitor
Otherrevenue4,4004,1005,200NewcompetitorNewcustomer
Changesininventories200125350……
Otheroperatingincome2,5002,1002,900……
Operatingincome25,30024,02527,100
Material/serviceexpenses12,70014,40011,200……
Personnelexpenses5,9007,2005,100 Yieldingtodemandsofthe union Reductionofovertime
Depreciation1,1001,3001000……
Otheroperatingexpenses4,6006,6004,200……
Operatingresults1000-5,4755,600
HowBandwidthBudgetingworks: ResultsfromBandwidthBudgeting
Incomestatement positions
KPImanagement steeringcockpit
M&A, investments, projects, covenants Ratingand financialmarket communication
HowBandwidthBudgetingworks:
Driveridentificationanddriverallocation
Driversareindicatorsforthedevelopmentdirectionandvolatilityoftheplanning position.Thebandwidthformthebasisoftheindividualpositionsontheincome statement,balancesheetandcashflowstatement.Itmustbepossibletomeasurethe driversinfiguresdaily,weeklyormonthly,andtheirhistoricalperformancemustbe available.Foreachplanningbandwidth,driversareidentifiedforthedescriptionofthe widthofthebandwidth.
Driversarethereasonsfortheopportunitiesandrisksintheplanning.
Drivercatalogue
Consumerclimateindexdriver
Rawmaterialpriceindexdriver
Weatherdatadriver
Salaryleveldriver
Interestratedriver
Driveranalysisanddrivertracking
Identificationofvariousdriverwidthsviatheidentificationand continuousmonitoringofthedevelopmentdataofthedrivers.
Thiscane.g.takeplaceinthecontrollingorriskmanagement
department.
Theadjustmentofthebandwidthsfortheplanningpositions resultsfromthedevelopmentofthedriverbandwidths.Forthis, simulation-basedproceduresareused.
Theupdatingofthebandwidthcanoccuronarolling,quarterlyor annualbasis,withthedriverdevelopmentsinformingthechanges.
Driver-baseddeterminationprovidesbandwidthdensities
Changesininterestrates
Determinati onof bandwidth dataonthe position
Determinati onof bandwidth data on the
Driver-baseddeterminationprovidesbandwidthdensities
Changesininterestrates
Determinati onof bandwidth onthe position
Determinati onof bandwidth on the KPI
Barerelperformance
Comparisonoftheactualdatawiththebandwidth information
Thebudget-actualcomparison(backtesting)shows,foreachbudgetitem,whetherthe performancewaswithintheanticipatedbandwidth.Deviationabove/belowthe bandwidthlimitsindicatesmissingdriversorincorrectdriverbandwidthwidthrelations. PositionBudgetBandwidthBandwidthActualDeltaInCausedby
Revenue18,20017,70019,00017,604-596 Below bandwidth No
Otherrevenue4,4004,1005,2004,679279 YesYes
Changesinstocks20012535022525 YesYes
Otheroperatingincome2,5002,1002,9002,53131 YesNo
Operatingincome25,30024,02527,10025,039-261 Yes
Material/serviceexpenses12,70014,40011,20012,7000 YesYes
Personnelexpenses5,9007,2005,1005,99696 YesYes
Depreciation1,1001,30010001,475375 Above bandwidth Yes
Otheroperatingexpenses4,6006,6004,2004,597-3 YesYes
Operatingresults1000-5,4755,600 271468 YesYes
Annualprofit100
Comparisonoftheactualdatawiththebandwidth information
Thecomparisonofthecurrentbudgetpositionperformancewiththebandwidthdriver performancehelpstoidentifymissingdriversandtocorrectlyestimatecorrelations betweendriversandbandwidthperformance . PositionBudgetBandwidthBandwidthActualDeltaInCausedby
Revenue18,20017,70019,00017,604-596 Below bandwidth No
Otherrevenue4,4004,1005,2004,679279 YesYes
Changesinstocks20012535022525 YesYes
Otheroperatingincome2,5002,1002,9002,53131 YesNo
Operatingincome25,30024,02527,10025,039-261 Yes
Material/serviceexpenses12,70014,40011,20012,7000 YesYes
Personnelexpenses5,9007,2005,1005,99696 YesYes
Depreciation1,1001,30010001,475375 Above bandwidth Yes
Otheroperatingexpenses4,6006,6004,2004,597-3 YesYes
Operatingresults1000-5,4755,600 271468 YesYes
Annualprofit100
Governance
5.Summary
Integrationofeventrisksintheplanning
Revenue18,20015,70019,000………………
Otherrevenue4,4003,1005,200………………
Changesinstocks20050350………………
Otheroperatingincome2,5002,1002,900………………
Operatingincome25,30020,95027,100………………
Material/serviceexpenses12,70016,40011,200………………
Personnelexpenses5,9007,2005,100………………
Depreciation1,1001,3001000………………
Otheroperatingexpenses4,6006,6004,200………………
Operatingresults1,000-5,4755,600………………
Operatingresultsacc.toeventrisks-10,5505,600………………
Bandwidthplanning+Eventrisks=Totalrisksituation
Totalriskresultsfromthecombinationofthebandwidthplanning(planningrisks)and eventrisks.
Thissolutionreliesonalreadyestablishedstructuresandcomponents.Eventrisksare modelledaccordingtotheambitionlevelandaggregatedthroughsoftwaretechnologyvia MonteCarlosimulationwiththebandwidthplanning.
bandwidthplanning
Comparisonofrisk-returnratioonthebasisofinternalrisk information
Internalbenchmarkingofthe businessunits:
• Withtheaidoftheaforementioned procedureondifferentlevels,theriskreturnratiocanbecomparede.g.onthe businessunitorprojectlevel.
Derivation of risk control measures:
• Riskandreturnshouldbeinproportion witheachother,wherebystrategic aspects(marketshare,marketgrowth, marketentrypoint)shouldbe considered.
• Fortheindividualbusinessunits,target bandwidthsshouldbedefinedand appropriateriskcontrolmeasurestaken toachievethesetargets(seee.g.BU6).
Strengthsofrisk-andincome-orientedcontrolling
Totalrisk
Individualrisk controlling
• Realisticillustrationofthetotalrisksituation,includingtheemergenceofsimultaneous risks
• Additionalinclusionofopportunities
• Quantifyingpossiblenegativedeviationsfromplanning
• Illustrationperbusinessunitoronprojectlevel
Totalrisk controlling
Evaluationoftheimpactofmeasureson(total)risk
Valueorientation
• Illustrationoftherisk-returnratioinbusinessunitsorprojects
• Analysisoftherisk-bearingcapacity(earnings,liquidity,rating)
• Riskcapitalallocationfore.g.businessunitsorprojectswithregardtoriskaspects
Evaluationandcontrolofinvestmentsonthebasisoftheiranticipatedrisk-adjusted contributiontocompany'svalue(internalriskinformationvs.CAPM)
Costsandweaknessoftherisk-andincome-oriented controlling
Costs Advancedprocedurefortheillustrationofuncertainty
Costdrivers
Weaknesses
• Ambitionlevelforthemodellingoftheindividualrisks
• Placewhereinformationisrecorded/Numberofcorporateunitstobeprocessed
• Numberandtypeofanalyses
• Numberandtypeoftheconsideredcausalrelationships
• Methodicallychallengingprocedure
• Requireschangingthemindsetoftheactingpersons
• Noconsiderationofdrivers
Summaryofimportantsubjects
• Scenarioplanningformsthebasisforunderstandingtheimpactofopportunitiesand risk.
• bandwidthbudgetinghelpswiththeidentificationofbudgetdeviationsandtheongoing improvementofplanningquality.
• Thedeterminationofrisk-andincome-orientedkeyperformanceindicatorsispossible bycombiningbandwidthplanningandeventrisks.
• Theplanningapproachpresentedherecreatesthebasisfortheevaluationoftheriskbearingcapacityofthecompany.
"Apathismadebywalking."
Chinesesaying