Developing a Strategic PlanBy Stephen Johnson | Posted 2012-06-05 Email Print
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Community services provider Arc of Yates utilizes simulation program to predict potential budget shortfalls.
Developing a Strategic Plan
Using @RISK, we were able to develop more effective strategic contingency plans and communicate our challenges to board members and other stakeholders. We also were able to quantify the magnitude and probability of risks in our funding streams that could affect our financial planning. And we could update risks monthly or even weekly to keep up with our fast-paced environment. As a result, we were able to gain crucial insights that enabled us to develop our three-year strategic financial plan.
Due to the magnitude of uncertainties and lack of clear guidance from the state of New York, some of Arc of Yates’ uncertainties were initially modeled as uniform distributions, which show an equal probability of all values occurring. As more information became available, those distributions became more refined to beta general distributions.
Because we are usually given a range of funding cuts (e.g., zero to 10 percent), normal distributions were not used, since it’s impossible to determine the mean or standard deviation: parameters that are required to use the normal. Where there was uncertainty in funding methodology, we used a combination of binomial and beta general distributions.
When historical data was available, we used @RISK’s distribution-fitting feature to determine the best distribution to use from the data. We are not sophisticated statisticians, but we found the above distributions to be easily understood by our stakeholders.
The software has also been instrumental in communicating risks to our board of directors. The graphs and output reports generated by @RISK are concise and easy to understand, enabling us to convey the key challenges and strategies to senior leadership more effectively and in less time.
One of the greatest benefits of using risk analysis software has been reducing a number of significant uncertainties down to a single output that provides our senior leadership and board of directors with a realistic expected outcome. Comparing the two outlying years in our three-year strategic financial plan has also provided advance warning that the next two years will be financially challenging.
As a result, we have reprioritized capital projects for the next three years and will work more collaboratively with similar agencies to reduce overhead and administrative expenses.
Using @RISK has empowered our organization to foresee potential obstacles and shortfalls in our budgetary forecast. By understanding risks, we are able to both quantify and focus on other activities that may generate replacement revenue and produce contingency plans for cost reduction.
Stephen Johnson is Arc of Yates’ chief financial officer.