There's likely no organisation in the world that has become successful without taking a few risks. "Fortune favours the bold" as the saying goes, and there are few places where that sentiment is more true than in business. Increased competition, more discerning customers and the recent demise of some Australian iconic companies has given risk management a new focus and eminence.
The strongest companies are the ones willing to adapt, and actively integrate risk management as part of strategic and operational enterprise planning processes to be more forward-looking with scenario modeling and business forecasting, to better identify risks and maximise opportunities.
More frequent and comprehensive modeling and analysis can improve predictability of business results.
Finding the way with forecasting
According to research by Deloitte, companies are under increased scrutiny from investors to display an understanding of risk, and adapt their financial planning accordingly. Traditional approaches to forecasting are no longer adequate, as they tend to be constrained by a system's ability to quickly adapt and adjust to changes within and outside the business or are manual in their approaches. The value of data analytics in terms of business risk management, according to the Business Performance Innovation (BPI) Network, lies in the ability it offers to make more accurate predictions when forecasting.
Forward-thinking companies are incorporating more frequent and comprehensive modeling and analysis into their budgeting, planning and forecasting. Their solution - risk-adjusted forecasting.
Rolling forecasts have become a useful tool for risk-adjusted forecasting, to more accurately predict future earnings and expenses when fluctuations occur. Unlike static budgets, a rolling forecast is updated regularly relying on an add/drop approach to forecasting that creates new forecast periods on a rolling basis. This allows finance teams to continuously alter plans and resource allocations based on changes occurring. If the forecast is also driver-based, this will account for the most critical variables that impact your business while forecasting finances strategically.
It's not just investors who are putting organisations under the microscope, however. The attention is also coming from within, as internal finance departments are seeking a more prominent role in future operations. BPM Partners notes the importance of ensuring a collaborative environment when forecasting and planning, as close consultation will ensure accuracy of data across the various levels of an organisation.
Accounting for risks when budgeting
In the 2016 Risk in Review study from PricewaterhouseCoopers (PwC), it was found that 64 per cent of high performing companies had budgeted effectively for risks of business disruption. This kind of preparatory strategy is seen as a critical evolution by PwC principal and risk management and compliance solutions leader, Brian Schwartz.
"Companies that are able to truly align their risk management activities with their strategic planning process and/or strategic priorities are moving the needle from enterprise risk management to strategic risk management," he said.
Most organisations, however, concern themselves with a historical or static approach to risk. Evaluating risks and identifying the critical factors to manage the range of potential future outcomes is often overlooked. Scenario-based planning and detailed modeling are powerful tools to better manage risk. Creating models at a granular level will allow businesses to maintain an agile plan that can be altered quickly, and can yield insights on emerging issues and make upfront mitigation strategies possible.
Capital and strategic projects, for example, could also be planned for separately and removed from your rolling forecast, so as not to skew the budget result, as they typically last over multiple years and contain a number of variables. A good enterprise performance management system will then integrate these components automatically back into the overall strategic plan.
