256 CHAPTER 11 MANAGING RISKS
It’s normally like this
If statisticians have added anything to human knowledge, it is their insight about what
you normally find when you look into a bucket of numbers. In case you are unfamiliar with
this, I will elaborate. It is a masterpiece of observation. But do not dismiss it lightly. It pro-
vides a great tool for understanding present and future events that affect your business.
It allows you to say with confidence, I am 95% certain that sales will be between $80,000
and $100,000. There is only a 12% chance that R&D will fail to deliver (you must have excel-
lent boffins). There is an 80% likelihood that profits will exceed $5 million. And so on. You
can use this tool to qualify any such statement. First, the mechanics. Remember, this is all
painfully obvious logic.
SYMMETRICAL OR SKEWED?
Take any measurement that is affected by a large number of independent influences. This
could be heights of mature trees lazing in a sunny forest, diameters of ball bearings roll-
ing off a production line, teenage girls’ spending on cosmetics. The measurements are
always clustered evenly on either side of the average.
If you plotted a chart showing these observations, you would have a bell-shape curve.
(See Figure 11.1.) It is called the normal curve because it is what you normally find in such
A digression. Sometimes observed values are not distributed so neatly. For example, a
chart of annual salaries would be skewed with a hump on the left – comparatively few lucky
tycoons earn big money. However, any set of data can be described with just three statistics.
1 The average (a measure of the middle or most usual value).
2 The spread (the range, between the smallest and the largest).
3 The shape of the distribution (normal, skewed).
17 Cash flow. Not enough kills. Too much, poorly deployed, reduces return on
18 Interest rates. Increases raise the cost of capital, reduce demand and damage
profits (unless you are a bank).
19 Exchange rates. Changes affect the cost of inputs such as materials;
can reduce the cost of imported competing products; can reduce your
20 Natural disasters. What would happen if flooding or an earthquake closed
your computer centre or your supplier’s factory?