At the Intersection of Forecasting and Risk Management

Survey says companies are increasingly focused on managing risks to corporate earnings, but internal challenges continue to hamper forecast accuracy.

Today, the Association for Financial Professionals (AFP) released the results of its “2014 AFP Risk Survey,” sponsored by Oliver Wyman. The survey of 554 AFP members revealed that although organizations expect the global business environment to remain challenging this year, finance executives are now more focused on internal issues than on the macroeconomic climate.

The external environment continues to cause concern: Forty-five percent of respondents said their company is exposed to more earnings uncertainty today than it experienced three years ago, and only 16 percent said they’re now operating with less uncertainty than in 2010. The causes vary. Just over a quarter of respondents (26 percent) cited financial factors such as credit, liquidity, interest rate, and currency risks as the primary driver of their earnings uncertainty. Almost as many (23 percent) cited business/operational risks (e.g., supply-chain disruptions, litigation, IT), and another quarter selected external factors such as regulatory and country risks. Only 19 percent reported that macroeconomic factors, such as GDP growth and inflation, are the key driver of their earnings uncertainty.

Only one in five (21 percent) reported a high degree of collaboration between their FP&A and risk management teams, while slightly more than half (53 percent) reported a moderate level of collaboration. Sixty-one percent of these respondents said that improving coordination between the FP&A and risk management functions leads to better forecasting because it improves the quality of finance and risk inputs from business units companywide. Fifty-seven percent said bringing the functions together improves the consistency of business and market assumptions, and for 56 percent it improves the consistency of data used for risk and FP&A analysis.

Perhaps that’s why almost two-thirds of organizations have responded to current and emerging business risks by increasing their focus on risk culture and risk awareness. Other responses include growing the company's product lines (58 percent of respondents), expanding geographically (48 percent), increasing capital expenditures (46 percent), hiring external resources (44 percent), and accelerating merger and acquisition (M&A) activity. (See Figure 3.)

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