Corporate financial professionals are having a difficult time calculating the financial impact of an increasing number of risks their businesses face, according to a new survey from the Association for Financial Professionals.
The “2012 AFP Risk Survey” asked senior finance executives about risks that worry them now, those most likely to cause uncertainty in the next three years – and actions they are taking to mitigate the risks.
Seventy-two percent of the respondents listed “managing financial uncertainty” – risks associated with credit, liquidity, interest rates and currency – as their top concern. Forty-one percent expect even more earnings uncertainty in the coming years.
While respondents were confident that they could figure out how financial risks could impact earnings, they had a harder time quantifying risks associated with regulatory change, natural catastrophes and the ups and downs of the economy.
Respondents cited risks associated with macroeconomic conditions – such as the pace of economic growth and inflation (38%) – and operations risks such as supply chain or production disruptions, litigation, labour and outsourcing (36%).
“The survey’s findings underscore the fact that it is more important than ever for financial professionals to develop the necessary risk management capabilities in order to thoroughly understand the impact of risk when making critical decisions,” wrote Alex Wittenberg, a New York partner with the Oliver Wyman Group, a management consultant firm that underwrote the study, which surveyed more than 400 North American financial professionals from large and small public and private companies.
Respondents noticed that the number of risk factors potentially affecting companies’ earnings had increased from five years earlier – 62% said so compared with 31% who said the level of earnings uncertainty was the same. Companies generating less than $1 billion in revenue felt the most exposed to this uncertainty (69%), followed by privately owned companies (62%).
Having gone through a credit crisis and a deep recession, 61% of respondents identified financial and macroeconomic risks as primary drivers of the earnings uncertainties they experienced the previous five years. But respondents anticipated that the risk make-up will change over the next five years.
Financial risks were expected to remain on top of the worry list, with 35% naming it the primary driver.
The uncertainty of nature, IT
External risks, including regulatory changes and natural disasters, moved into second with 25% expecting it to be a primary driver of increased earnings uncertainty over the next five years.
This realignment came on the heels of at least nine natural catastrophes that hit businesses worldwide in the first half of 2011, each of them resulting in insured losses of more than $1 billion, the survey pointed out.
The most popular response by far to the increased uncertainty was to upgrade IT systems – 48% of companies invested in IT upgrades while 21% slowed IT investments.
About one-third of respondents said their companies increased margin growth targets and about as many companies increased as decreased their use of hedging.
—Sabine Vollmer (email@example.com) is a CGMA Magazine senior editor.