What is risk-based budgeting?

The age-old, farmer-proven method of underestimating receipts and overestimating expenses (at least 5 percent for each), is referred to as risk-based budgeting and is a useable and useful mechanism for accounting for risk. Estimating the value of buildings under different downside receipt and expense scenarios provides the potential buyer with information that will help answer the question, What happens if something goes wrong?? It is the downside scenarios that have the potential to create financial problems that need to be avoided if at all possible. Upside surprises (higher receipts and lower expenses) are usually looked upon favorably and generally don’t create problems.