By incorporating a wide range of assumptions, risk-adjusted forecasting can provide companies with a greater understanding of potential risks and mitigation strategies. Demystifying Risk-Adjusted Forecasting
, AFP’s latest FP&A Guide, outlines how risk-adjusted forecasting can work in practical terms. The guide, sponsored by Wdesk, includes interviews with over a dozen practitioners and experts, as well as eight case studies that demonstrate different companies’ approaches to risk in their forecasting process.
In the past few months, there’s been a virtual avalanche of articles and publications replete with flow charts and complex risk models that aim to show companies how to integrate risk into their forecasting process. But do companies actually use these approaches in their daily operations? AFP research shows the implementation of risk-adjusted forecasting is still in its embryonic stage. Very few organizations have actually adopted a textbook framework, implemented sophisticated modeling architecture, or fully integrated their risk and their financial planning and analysis (FP&A) functions.
That is not to say companies do not adjust their forecasts for risk. Many companies already look at various risks that could affect the delivery of their plans, and they incorporate one or more of these variables into their forecasting and planning process. They just don’t put the risk-adjusted label on the process, and they don’t use fancy models and quantitative analysis. Instead, they prefer high-level views of what variables and risks may impact performance.
So, while adjusting for risk still involves a fair amount of guess work, at least companies are beginning to link risk to forecasting and planning. And plenty of them are moving up the maturity scale. The 2014 AFP Risk Survey, conducted in collaboration with Oliver Wyman, focused on how risk management is integrated into the financial planning process. The study findings show that increased risk and unpredictability in the business environment is causing a greater focus on the intersection between FP&A and risk management. According to the survey results, over 90 percent of senior financial executives consider risk management extremely or very important.
“Leading companies are focusing on collaboration between FP&A and risk management to improve the quality of finance and risk inputs from a variety of business units in order to provide their executive teams with better business insights for strategic planning and forecasting,” the report states.Download the AFP Guide to Demystifying Risk-Adjusted Forecasting, as well as other FP&A Guides, at www.afponline.org/fpaguides.