Jawwad Farid Profile picture
Oct 2, 2020 8 tweets 4 min read Read on X
1/ Shortfall analysis

In #risk a powerful concept named #shortfall analysis works very well as for building financial models for #founders and #startups.

It's a bit of a mind bender the first time you read it but has interesting applications once you understand it.
2/ Imagine an important business metric.

Let's say customers order. Link that to an equally important performance measure. Profit & Loss (PnL).

The two are clearly linked.

How would you stress test or sensitivity test them? For an internal planning meeting? For a money pitch?
3/ There are 3 models you can pick for a stress test.

a) What could be our worst case loss if PnL turns negative?

b) What is the probability of a negative PnL?

c) How much do customers orders need to drop for us to hit the red zone?
4/ If you bind (b) and (c) above you end up with shortfall analysis.

How much do customer orders need to fall for our PnL to turn negative? What is the probability of that event?
5/ The concept maybe a bit awkward to grab but the underlying math is high school statistics.

As is the case with simple models, the model is very crude and comes with a long list of challenges.

But its a very powerful thinking tool.
6/ Imagine the applications. It's not just limited to customer orders and PnL.

If you have a measurable metric with a historical trend and a quantifiable relationship you can apply shortfall analysis to it.

Simple questions, simple answers.
7/ Within the banking, insurance and financial services world, we use shortfall analysis for capital modeling and planning and communicating risk thresholds to boards.

There is no reason why the same principle can't work for your #startup as long as you have data.
8/ An excerpt from the revised edition of Founder Puzzles, out later this month in October. Watch this space for the pre-order form.

#startups #founders #shortfall #analysis #financial #finance #modeling.

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More from @rebootdude

Jan 31
Had two insightful chats with two fellow academics and educationists yesterday.

The topic? What is it that we need to change to improve state of higher education in universities we teach in.

Here is a quick summary / the cliff notes edition of the conversation.
The purpose of undergraduate education?

Help our students discover, explore, develop and acquire interests.

A more ambitious goal? To get comfortable with personal performance windows and envelopes.

What are you really capable of? What is it that you want to do? Who are you?
The "who are you" question has been a key question in my life.

Self awareness is a powerful personal attribute that simplifies decision making and goal setting.

Because once you have answered this, you can also answer where do you want to go and what do you want to do?
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If there is a shortfall, move money around.
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If you work with risk, insurance, trading or pricing, loss distributions are a key concept.

Traditional or introductory statistics courses don't have time to do justice to them.

We took a deep dive with automobile claims data (80,000 rows) in the ADA course.
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Loss distributions focus on b).

If a claim occurs how big or bad is it likely to be?
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A large majority of motor insurance claims are within pricing limits.

A small percentage are 25 - 50x larger.

If we could identify the profile, we could price/underwrite better risks.
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How do you encourage or foster creativity?

Cross pollination and collaboration of ideas from different worlds and backgrounds?

We learn more when we

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How would you design a high fidelity prototype for a game without using technology or standard art?

You level the playing field in one stroke. No developer, artist or designer would have an edge.

Only creativity would rule.

Welcome to @ibakarachi @Mindstormstudio @RaptrGames
Open to all undergraduate and graduate programs in Karachi.

If you are:

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Fun talk today by Dr. Alnoor Bhimani @ibakarachi on data as a product, monetizing data, qualitative insights, and decision making processes.

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Small shop. Large footprint.
2018-19.
IFRS 17.
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First and second half marathon.
Remote work + Zoom Cohort based live training.
Founder Puzzles. Product launch.

2020-21.
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