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2013 AFP Risk Management Survey: Earnings Uncertainty Increasing

  • By Staff Writers
  • Published: 2013-02-27

WASHINGTON - Earnings uncertainty has increased in the last five years since the onset of the 2008 financial crisis and will continue for at least the next three, according to finance executives in a survey released Wednesday by the Association for Financial Professionals (AFP). The survey is the second in a series of annual risk-management reports published with collaboration from the Global Risk Center of the Oliver Wyman Group.

The 2013 AFP Risk Management Survey asked CFOs, treasurers and other senior finance executives how their organizations are addressing risks through a risk-adjusted decision framework that includes forecasting, risk culture, organizational structure, metrics and other solutions.

Fully 58 percent of respondents reported that their organizations are exposed to more earnings uncertainty today than five years ago. Furthermore, more than half expect the forecasting of critical variables to become even more difficult in the next three years.

Among these critical variables, the largest share of survey respondents (30 percent) cited macro-economic factors-such as GDP growth-as the most influential factors driving earnings uncertainty, followed by financial factors, external conditions and commodities. Respondents from publicly traded companies cited commodities as the most influential factor; those from privately held companies tended to cite financial factors and business operations.

Primary Drivers of Earnings Uncertainty

Macroeconomic           30%    27%    24%
Financial                      23%    17%    33%
External                       19%    20%    13%
Business/Operations    17%    13%     22%
Commodities               11%    23%       7% 
                                    All     Public  Private
Key Risks

More than half of treasury and finance professionals report that it is more difficult to forecast risk today than five years ago. Furthermore, the risks that are hardest to forecast are having the greatest impact on earnings and will continue to influence financial results in the future, respondents say. They predict the risks with the biggest impact are customer/satisfaction retention (cited by 44 percent of respondents), regulation (37 percent) and GDP growth (35 percent), followed by political risk (28 percent), interest rates (21 percent) and credit risk (21 percent). Executives companies with revenues under $1 billion saw customer behavior as having the biggest impact, whereas those from larger companies saw GDP growth as having the biggest impact.

"From subtle changes in consumer tastes to sweeping changes made by regulators, future risks can be difficult to manage proactively," said Jim Kaitz, AFP's president and CEO. "That's why a risk mindset must permeate the entire organization."

Added Alex Wittenberg, a partner at Oliver Wyman and head of the firm's Global Risk Center: "Developing a sustainable competitive advantage in an increasingly uncertain environment is the most important issue facing business today. Those companies that understand how risks inherent in their inputs, outputs and operations will explicitly impact their financial results are more likely to seize on new opportunities and lead the pack."

To mitigate risks, executives report that they are responding with a strategic investment of time, energy and resources. They are elevating the importance of risk within their organizations by building awareness, testing assumptions more widely, investing in IT, and providing advice and insight. The survey found that some organizations are even completely recalibrating their risk management structures, reporting lines and internal partnerships because these are decidedly mixed across organizations. In addition, more than half of respondents are conducting more reviews of emerging risks at a senior level.

ABOUT THE SURVEY

In November 2012, AFP surveyed its senior level corporate practitioner membership about uncertainty and the way their organizations manage risk. The survey was sent to AFP members with job titles of CFO, treasurer, controller, vice president of finance and assistant treasurer, generating responses from 547 financial professionals at a range of organizations, large and small, public and private, across North America. Read findings from the 2013 AFP Risk Management Survey (PDF): www.afponline.org/risksurvey

ABOUT AFP® 

The Association for Financial Professionals (AFP) is the daily resource for a network of more than 16,000 treasury and finance professionals. Headquartered outside Washington, DC, AFP provides members with news, economic research and data, treasury certification programs, networking events, financial analytical tools, training, and public policy representation before legislators and regulators. AFP's global reach extends to over 150,000 treasury and financial professionals worldwide, including AFP of Canada; London-based gtnews, an on-line resource for the treasury and finance community; and bobsguide, a financial IT solutions network.

ABOUT OLIVER WYMAN

With offices in 50+ cities across 25 countries, Oliver Wyman is a leading global management consulting firm that combines deep industry knowledge with specialized expertise in strategy, operations, risk management, organizational transformation, and leadership development. The firm's 3,000 professionals help clients optimize their businesses, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is part of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit www.oliverwyman.com.

ABOUT THE GLOBAL RISK CENTER

The Global Risk Center is Oliver Wyman's research institute dedicated to analyzing increasingly complex risks that are reshaping industries, governments, and societies. Its mission is to assist decision makers to address these risks through research and insights that combine our rigorous analytical approach to risk management with leading thinking from research partners.

 

Copyright © 2014 Association for Financial Professionals, Inc.
All rights reserved.

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