With the economy facing the uncertainties that we are looking at right now, the question has to be whether the predictive financial models are showing enough ‘headroom’ to weather the storm.

Scholastic modelling is a process of devising models that include the mechanisms that allow for the projections to be changed as specific risk criteria are altered. Some simple examples of some of these criteria would be sudden moments in the ZAR exchange rate or the REPO lending rate,

All material risk criteria are established up front and formulas are built into the model allowing for the projections to change as the assumptions are changed.

This is pretty basic stuff and most CAs(SA) are aware of this process and have used it somewhere in their careers. Actuaries are particularly adept in constructing these models – and they are made far more sexy by including statistical mathematics to beef up their conclusions.

This is all well and good.

But we are facing difficult times and we should all be willing to build in a little bit of extra headroom to protect the outcomes should unforeseen issues materialize out of the of nowhere.

I was at a conference recently where the prominent Dr Len Konar presented a fascinating discourse on audit committee member responsibility. He used the term ‘headroom’ to describe that added bit of fat that should be included in predictive modelling to avoid any unnecessary surprises.

I liked the term,

Hence this article!

But bear in mind the extent of the headroom is still a subjective call.

I think what Len was eluding to was to make it more roomy – take your best guess and add on a little bit more than a little more!