The role of the CFO is now more than just budgeting and monitoring balance sheets. While risk management is a central part of their roles, as finance chiefs, they are expected to mitigate risk through a strategy that will not only protect finances but also contribute to the company’s growth objectives.
The business environment is fraught with risks – markets are constantly changing, and with every change things become more complex. In any company, taking risks is a fact of life, because only then can they fulfil their potential.
Managing risks is an important role that concerns anyone in the C-suite. However, as caretakers of a company’s finances, this responsibility can be more crucial for a CFO.
First things first, what are the factors that CFOs perceive as risks? According to Ralph Khoury, CFO, TBWA/ RAAD, risks are any issues that can negatively impact a transaction, a decision, strategy or initiative.
“If not managed, risks have the propensity to negatively impact a potential outcome, resulting in a lower return, asset impairment, and a higher exposure than desired,” Khoury explains.
In simple terms, a risk is defined as someone or something that may cause an unpleasant or unwelcome event to happen. However, in a business sense, a risk is seen as any event, action or even lack of action that may affect an organisation’s capacity to achieve its strategic objectives. Often, there is a negative notion about risks, certainly if handled poorly they are bad for your business, but if managed in the right manner can be rewarding.
Risk management goes hand-in-hand with strategy. Devising risk mitigation plans is an area that requires a concerted effort by the organisation’s top decision makers. It is important that these plans are aligned with the business plan of an organisation. As stewards of a company’s financial health, CFOs are expected to play a lead role in orchestrating efforts for an effective risk management strategy while ensuring that the approach is integrated within the company’s growth objective. “There is a very strong correlation between a strong risk management and a positive bottom line performance of a company,” says Murtaza Chevel, CFO, Union Properties. “Financial risks do not only arise from oversight on a financial issue, but more often than not, risks arise from non-financial issues or transactions, which later inevitably translate into financial risks which can adversely impact an organisation.”
Atif Khalil, CFO, Wavetec, agrees with this view, saying that strong financial risk management can certainly protect and even improve the overall performance of the company. “An effective risk management strategy definitely affects the bottom line of a company because if we fail to assess the possible impacts of a risk, two things are likely to happen – either revenue and income targets are not achieved or the company might have to pay abnormal expenses that are not budgeted. In both cases the bottom line profit decreases.”
While there are a lot of systems and technologies available that can help a CFO to draw up approaches to mitigate risks, having the right intelligence is still key. The proper experiences and know-how are a big factor in leveraging management to enhance business growth. Although it is undeniable that CFOs have the acumen in dealing with these issues, that business arena is unpredictable and there really is no ‘one size fits all’ approach.
CFOs and other executives from numerous segments deal with risks using different methods, however, the end goal still leans towards maintaining the growth of the business. Khalil believes that mitigation strategies are fundamentally dependent on the nature of the risk. “Firstly what we do is identify the risk, its threat level, the probability of occurrence, and impact,” he says. “Then we decide which strategy to adopt for risk mitigation. Sometimes we avoid the risk by changing our business plan, or we control the risk by adopting any process or additional procedure, or transfer the risk to another entity. But there are cases wherein we cannot do anything yet, except monitor various factors around it.”
Chevel, on the other hand, thinks that your risk strategy is only as good as your implementation. “A strategy is only effective if properly executed and followed,” he says. “In reality the CFO has to be on a constant lookout for screening actions of all departments within the organisation to ensure nothing is overlooked. Having regular meetings with all departments to discuss new issues and developments can be helpful, and this serves as a significant source of identifying potential risks.”
He goes on to say that when a significant financial issue arises they often seek a concurring review and input from legal and compliance teams to ensure no potential risk is overlooked.
“On a personal level as CFO, I interact on an almost daily basis with most department heads to discuss recent departmental initiatives,” he adds.
Another important aspect that guarantees value creation from risk management is the collaboration between the CFO and the CEO. These two highly influential individuals within the company are at the helm of progressing the business, therefore, a positive alliance between them is definitely advantegeous.
“When analysing and assessing risks for a business, all the elements and factors need to be tabled. CEOs and CFOs view the business plan from different perspectives,” says Khoury. “Bringing those perspectives together to assess and manage risk is an optimal scenario. Without the input of these figures, dysfunctional decision-making prevails and business plans are left to chance, rendering the likelihood of success low.”
He further explains that the collaboration between CFO and CEO is important whether it be for aiming to get a large client, or taking a bet on a particular strategic market, to determining whether to go for a short-term or long-term office lease. These decisions should be subject to an important collaborative risk assessment and sensitivity analysis, as a firm basis to determine the final approach.
The overall success of a business is reflective of the effectiveness of the C-level team. A harmonious rapport between these two leaders can maximise the business’ productivity and overall performance. Good synergy between them opens a lot of possibilities for the business to flourish.
Khalil stresses that it is imperative that both are on the same page when it comes to business planning and risk mitigation; because only then can they develop a strategy that is most favourable for the company. “The CEO is responsible for business operations whereas the CFO is responsible for the financial operations of the organisation,” he says. “In all business risks there are underlying financial risks which need to be assessed and addressed in a timely manner so that business objectives are met. This can only be achieved when CEO and CFO understand each other.”
Essentially, a good risk management is not about avoiding risks but instead having the capability to transform them into opportunities. With a role spanning the organisation, the CFO is well-positioned to link strategy and results. They are now viewed as co-pilots, responsible for effectively mitigating risks, aligning with business plans and driving growth.