Enhance Finance with Risk Methodologies

Its another?#throwbackthursday , this one is from the AFP Guide to Increasing FP&A’s Effectiveness by Integrating Risk Management. The full report can be found here: https://bit.ly/3fKx53y .

=========================

The basis of corporate finance is the concept of creating value in excess of your cost of capital or alternative use of that capital. In an uncertain world, Management marshals the resources of the company and taps the market, sets objectives for how to create value, and delivers on those objectives. Success is not guaranteed, which introduces risk: risk is any uncertainty that could lower value and diminish success of the enterprise. Value is what matters to the organization, such as mission, financial goals, customer satisfaction, etc.

The CFO role in risk management is recognized at the board level. Already, 89% of CFOs report to the board on risk topics, and for 31% of companies, the Audit Committee is the primary location for risk oversight.1 The CFO is the steward of company’s capital resources, a role that once focused solely on control and accurate reporting of assets, and now has grown to the forward-looking deployment and re-deployment of capital to grow value.

As a direct report of the CFO, FP&A already provides numerous risk management activities: seeding the strategy throughout the organization through budgets, forecasts, investment analysis, operational analysis, and performance reporting. As Peter Drucker wrote:

“Strategic planning is the continuous process of making present entrepreneurial (risk-taking) decisions systematically and with the greatest knowledge of their futurity; organizing systematically the efforts needed to carry out these decisions; and measuring the results of these decisions against the expectations through organized, systematic feedback.”

FP&A is a natural connect to risk management because we constantly deal with volatility, uncertainty, complexity and ambiguity from efforts to forecast and project financials forward.

The coronavirus crisis has highlighted the importance of integrating fast, informed planning to strategically and tactically align finances and operations to react to risk events.

Trends in risk management also bring FP&A and risk closer together. In recent years, the risk management field has been moving in a similar direction to finance, broadening its scope from event-driven losses to a forward-looking view of risk as anything that obscures the pursuit of value.

“Finance people are good business people, not just bean counters,” says Paul Sobel, Chair of COSO. Both FP&A and risk can seize this opportunity to create two significant benefits:

? FP&A can improve their craft by incorporating risk management principles

? FP&A can contribute to the risk management process.

====================

Past #throwbackthursday articles:

Planning Horizons and Hierarchies

5 Ways to Improve Your Investment Analysis