CFOs can use risk-adjusted forecasting and planning to protect and enhance value, boost confidence, and manage risk.
Financial forecasts and plans carry a lot of weight in the business world. But how much confidence do companies and CFOs really have in their forward-looking numbers? Especially in a business environment that is increasingly complex, uncertain, and risky.
Are you in a world of best guesses?
Forecasts and plans are often created by aggregating 'best guesses' from across the enterprise without focusing much attention on the risks that could have a major impact on actual performance.
Sure, everyone builds a safety buffer into their estimates and many companies conduct a sensitivity analysis to see how variations in single factors, such as average selling price or foreign exchange rates, will affect their forecasts and plans. However, these limited approaches to risk are not nearly enough to reflect the rising challenges and complexity of today's global business environment.
Some companies have come under scrutiny recently because their financial plans and forecasts were not robust enough. And even those that have not been flagged face increasing pressure from analysts and investors to clearly demonstrate how their plans and forecasts are affected by risk, and what they are doing to quantify and manage risk more effectively.
Is one version of the truth enough?
To address these challenges, businesses should move beyond the traditional approach of generating a single set of aggregated numbers and then hoping it is sufficient. In order to improve their forecasting and planning processes, CFOs should incorporate multivariable risk modelling and analysis that shows a broad range of likely outcomes and their associated probabilities.
This improved approach – which we call risk-adjusted forecasting and planning – enables companies and CFOs to have greater confidence in their forward-looking plans and forecasts, and to manage risk more effectively. It also gives CFOs greater insight into overall business risk, helping them identify potential problems before they occur – protecting value – and to spot new opportunities for value-creation.
Is it time to take the leap?
Companies that take the leap are likely to find that risk-adjusted forecasting and planning is not nearly as complex as it seems, and that the results are well worth the effort. Analysts, investors, and ratings agencies recognise the limitations of the old approach and are looking for insights about risk that are more detailed and nuanced. Risk-adjusted forecasting and planning can help address that need, while providing business leaders with the risk insights they need to make smart decisions about capital allocations and investments.
Ready. Set. Go.
Ironically, the biggest barrier to change often comes from CFOs themselves. CFOs know the traditional methods are far from perfect, and once they learn about risk-adjusted forecasting and planning, they quickly recognise it as a leading approach.
Yet many are reluctant to move away from the status quo however it may not be long before they don't have a choice. Today's business environment is more complex and risky than ever. Financial forecasts and plans must reflect that complexity and uncertainty; otherwise, businesses expose themselves to unacceptable levels of risk. The stakes are high and CFOs have a personal interest in getting this right.
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