In an increasingly volatile world, companies are findingit more difficult to forecast various factors, and that is creatinggreater uncertainty around corporate earnings.

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A survey of North American finance executives by the Associationfor Financial Professionals (AFP) and Oliver Wyman Group found that53% said earnings uncertainty is a bigger concern than it was fiveyears ago, prior to the financial crisis. And there's little reliefin sight, with 52% predicting that earnings uncertainty willincrease over the next three years.

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“The overall number of people who felt that forecasting ismore difficult than five years ago, that's a startling number,”said David Beckoff, manager of survey research at AFP and theauthor of the report. “It also jumps out that when you say whatabout the next three years, basically an equivalent number say it'sgoing to get more challenging.”

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Macroeconomic factors such as GDP growth were the biggest sourceof increased earnings uncertainty, cited by 30% of the 547respondents. Twenty-three percent of the executives cited financialfactors, such as credit availability and liquidity, while 19% citedexternal factors like regulatory risk. Bringing up the rear werebusiness and operations, cited by 17%, and commodities, cited by11% of the executives.

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Looking ahead, 44% of executives said their company's ability tosatisfy and retain customers was the factor that could have thebiggest impact on their earnings in coming years, while 37% citedregulation and 35% GDP growth.

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The fact that key upcoming risks involve areas outside of thepurview of finance and treasury departments, like customersatisfaction and retention, helps explain the heightened earningsuncertainty, according to Beckoff.

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When asked which aspects of the business were most difficult toforecast, 72% of the executives said natural catastrophes, 67%cited regulatory risk, and an equal percentage cited productliability.

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Part of the problem with forecasting may lie in the companies'skill level. The majority of executives were critical of theircompany's forecasting abilities, with 47% saying forecasting neededto be improved and 10% describing their company's skills as “weakto non-existent.”

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Asked to pinpoint the weaknesses in theirforecasting, more than half (52%) of the executives cited problemsin capturing relevant data from within the company, while 47% saidthat integrating risk and forecasting data to make strategicdecisions was a challenge and 44% cited difficulty in gatheringdata from external sources.

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“Finance respondents saw that the challenge with theirforecasting is not so much about resources, like staff, it's aboutdata capture and integrating information,” Beckoff said. “More ofthem put the finger on what I would describe as big datachallenges¾making sense of a lot of information andbeing able to act in a quick time frame.”

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Certainly the most prevalent action in response to businessrisks was increasing the company's investment in IT systems, whichwas cited by 57% of respondents, while 53% said they had increasedtheir revenue growth targets and 52% said they had increased thefocus on risk culture and awareness.

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Further, companies with good risk management practices have agreater awareness of the complexity of risk, generally speaking,and a greater understanding of the interrelationships betweenrisks, according to Theresa Bourdon, a group managing director atAon Global Risk Consulting, citing data from Aon's Risk MaturityIndex, a tool that customers can use to assess their riskmanagement efforts.

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Companies that score well on the index also fine-tune theirforecasts by incorporating risk-adjusted return expectations foreach of the company's units or departments, Bourdon said.

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Companies should also be taking into account external partiessuch as their suppliers and competitors, she said. “Don't set yourforecast and planning and strategies all internally. There has tobe external input around what you're doing in forecasting.”

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Top performing companies also include information about theirindustry. “When they develop a forecast, they're doing it veryspecific to the industry they're in and the market assumptions,”Bourdon said. “Take the construction industry–if you're in a robustperiod, you should be building that into your projections. If themarket changes, you've got to adapt to that, build it into yourexpectations.”

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“Really mature companies are making those adjustments as theydevelop their forecasts and projects,” Bourdon said. “As a result,they're minimizing the volatility of their results.”

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Research by the University of Pennsylvania's Wharton Schoolshows that companies that score well on Aon's Risk Maturity Indexperform better financially than those who don't, she added.“There's definitely a return on the investment for having a strongrisk management program,” Bourdon said.

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Susan Kelly

Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.