Today’s CFO is gaining more and more clout at the executive table, and with it, more complex challenges to keep them up at night. They’re being tasked with not only managing costs and financial operations, but also providing strategic direction to their CEOs concerning growth planning and acquisitions.
Additionally, CFO.com reports seeing a “rising appetite for risk in the marketplace that could create a volatile operating environment.” The article continues: “The combination of market uncertainty and a pursuit for return have the potential for unwanted surprises if companies don’t ensure they have appropriate controls over their important processes, including financial reporting.” As a result, the CFO’s role in enterprise risk management is paramount.
Best-in-Class CFO’s know that effective risk management demands more than going through the motions of compliance exercises. Finance leaders need to manage the internal controls that satisfy compliance requirements, while also planing for all areas of organizational exposure to risk (financial, operational, reporting, strategic, etc.).
With so many cloud- and software-based financial reporting solutions available, we asked Randy Johnson, CFO of Talent Plus, what sets the best-performing risk management technologies apart from the rest:
“There are many different technologies that claim to provide forecasting and risk management. Most large accounting software providers have built-in forecasting functions, though many are not good. For a forecasting tool to work properly, it needs the ability to forecast at very low levels, and it needs to link directly to actual results at those same levels of detail.
If these two functions work properly, the company is able to look at detailed versions of forecast versus actual results and focus in on variances and drivers of that variance. Absent of this ability, the true value of forecasting is limited. Because many small systems do not have this full functionality, many organizations still do forecasting outside of their primary accounting systems, which is inefficient, at best.
Managing risk is more difficult. While forecasting is quite homogenous (i.e. estimating a quantity sold at a price), managing risk is quite specific to the industry in which a company operates. The more classic and widely understood risks are covered typically through insurance, i.e. property, casualty, workers’ compensation, cyber, etc., or through internal controls, i.e. liquidity risk.
However, many industries have greater industry-specific risks and thus specific ways to manage those risks. The commodity trading/merchandising industry has a much different risk profile than the professional services industry, for example. Firms in the commodity industry have entire systems to track the daily positions held and the daily prices of each commodity, as well as algorithms to calculate different value at risk (VaR) scenarios. These are not risks associated with a firm that provides professional services.
In summary, as there are many different types of risk, there is typically not one system at any organization that is able to manage all of those risks. It is typically a function of the Chief Financial Officer’s department to ensure that all risks are being managed.”
To learn more, read our report, Improve Treasury and Risk Management through Integrated Cloud Solutions.