Risk and Opportunity (R&O) are a duality — like two sides to the same coin. They can have a negative or positive effect on the profitability, cash flows and financial position of any company.
The beginning of a financial crisis is the right time for the FP&A team to revisit the company budgeting and forecasting. The FP&A team's task should be to monitor the KPIs and manage them to provide data to the decision-making authorities in real-time.
Traditional forecasts and plans typically use single-point estimates and metrics with little or no discussion of R&O, and without showing correlations among multiple R&O that could have a major impact on performance. R&O adjusted forecasting and planning is an approach to forecasting that generates a range of possible outcomes and probabilities based on an analysis of multiple variables of R&O.
The practical application of R&O approaches within financial planning can help businesses in driving more value and most useful for decision making.
Today FP&A professionals are taking a more integrated approach that includes assessing the risk in a plan; identifying whether numerical assumptions represent risks or opportunities, and developing a common language around financial planning. For example, when we talk about a budget versus a forecast versus a target, all business units need to have the same understanding.
Risks and Opportunities are split into three categories:
Corporate. These are R&O that relate to the long-term goals of the Corporate. These tend to be medium to long term but some may feature for a shorter period of time because of a significant event or planned business activity. The most effective long-term planning processes are iterative and linking strategic with regular forecasts and risk/opportunity analysis. Inclusion of Risk or Opportunity in the Long-Term Financial Plan by FP&A professionals provides recommendations to Executive Management on how they manage/mitigate them and gain competitive advantage.
Service / Product Lines. These are R&O that relate to business operations of each service / product lines or business verticals. Service R&O should also link to each Service area’s Business Plan. Service Risks will also be identified as part of the business planning process. As part of these business planning processes, each Service area will be required to complete a business impact analysis which will identify risks associated with its operation and the impact on business processes/activities and appropriate mitigation procedures that will be implemented. Service Business unit strategies will help to mitigate the financial & operational risks.
Account / Project. These are Risks identified in connection with all major projects / client accounts which the company undertakes. These projects are run in accordance with appropriate account management guiding principles. Identifying the various R&O the Account / Project is exposed to as well as their drivers requires both a bottom-up and top-down approach. A bottom-up approach helps identify, assess and evaluate the risks operating at the account level. A top-down approach looks at the risks of the strategy and to the strategy and how they can be mitigated.
Is there anything FP&A can do to respond to the immediate challenge of COVID-19, right here and right now, as the coronavirus crisis is roaring around us? Yes, there is. FP&A professionals must prepare for the short-, medium- and long-term effects of the virus on their companies. To understand that impact, they need to undertake a significant exposure exercise. But they can’t do that alone. They should proactively engage business partners within the organization who can shine a light on exposure from their unique lens into the business.
Coronavirus is not a reasonable variable, and for that reason, the Financial Plan and Target must be revisited with an eye toward the major “puts and takes.” FP&A Professional must address the risks and opportunities posed by a range of virus scenarios, building high-level models of business cases to quantify the impact on P&L, cash flow, and balance sheet. Scenario planning can be used to build prediction models and forecasts to evaluate the potential impact of the pandemic.
FP&A professionals have a critical role in risk and opportunity management as the creators and designers of systems that establish key performance indicators and measure performance against them.