In the past, organizations primarily relied on CFOs to save them from financial ruin. Back then, financial officers served as the authority behind the company’s purse strings. The role of CFO in modern times has evolved beyond this to include comprehensive risk management. While organizations can face a wide range of risks, CFO compliance concerns and financial risks rank at the top of the agenda for most.
What Are the Main Risks CFOs Need To Consider?
Every business and its operations are unique. Even so, most business risks fall into recognizable categories: financial and operational risk. Combined with a few additions, they comprise enterprise risk management.
Financial Risk
As the name implies, these risks come down to money and its availability. Not surprisingly, the strategic risk management tasks that CFOs handle tend to focus primarily on this area. Consider these examples:
- Liquidity: The number one financial concern businesses grapple with is cash flow. CFOs ensure the accounting team has the cash flow it needs to cover all expenses or to take advantage of opportunities.
- Debt: Most companies rely on some level of debt or credit to finance operations. However, too much debt can become a burden to a business. CFOs help companies strike the right balance.
- Financial Compliance: Government agencies regulate businesses of all sizes in America. The specific regulations differ based on formation type, size, industry and whether the company is publicly traded. CFO compliance primarily involves accounting and taxation.
- Mergers and Acquisitions: When buying or selling businesses, CFOs become responsible for reviewing financial documents or providing them to relevant parties. They also review the financial aspects of contracts to ensure the move is beneficial.
Operational Risk
CFOs must work closely with operations managers and line managers to account for operational risks. Consider the most important divisions:
- Supply Chain: Without the materials they need, companies might find it difficult to operate. Labor shortages, trade wars and catastrophic events can cause disruptions.
- Operations Compliance: Some industries have compliance requirements when it comes to processes and production. These can range from inspections to safety gear.
- Process: Managers tend to look for inefficiencies in processes, but it’s also important to look for risks. For example, outsourcing vs in-house has disclosure risks.
- Personnel: Human resource managers work closely with operations managers and CFOs to reduce risks related to workers. Safety issues and workplace discrimination are two examples of risks.
Other Risks
Some additional concerns can fall into both financial and operational risks. In other cases, they don’t necessarily belong to a specific header but can affect both. Consider the following:
- Geopolitical: When governments change hands around the world, they often create new policies that can affect business operations and finances.
- Technology: Security risks can pose both financial and operational threats to businesses. IT can also present one source of outsourcing risk.
- Catastrophic: While the supply chain most often comes to mind, disasters can also lead to labor disruptions, political changes and new economic policies.
- Reputational: Social media and the 24/7 news cycle has increased the need for public relations and communications specialists to mitigate risks to a business’s reputation.
What Are Some Good Risk Management Initiatives?
Simply completing a strategic risk assessment hardly accomplishes anything for the business. A hodge-podge of responses across the organization would ultimately do more harm than good. Consequently, CFOs and other managers work together to tackle strategic risk planning.
1. Collaboration
CFOs do not have all the knowledge, skills and experience to strategize across the organization alone. By collaborating with the board and other business unit managers, they put themselves in a much better position to make beneficial decisions for the entire business.
2. Transparency
Other department heads often feel the need to convince the CFO to sign off on budgets throughout the year. Educating department heads on the financial situation and making financial information available can reduce some of the friction associated with this.
3. Technology
For years, Excel represented the best innovation in finance. Since then, software has developed beyond just serving as digitized ledgers. CFOs can leverage technology to access and share real-time data regarding company risks on all fronts.
4. Mitigation Plans
CFOs must have mitigation plans in place to address all the many types of risks identified. These professionals also need to determine a threshold when these plans take effect. Consider the following examples:
- Setting a schedule for digging deeper into strategic risk assessment data and strategizing
- Setting aside a contingency fund to tackle emergency expenses, shortages or expensive price hikes that might occur
- Identifying a level of cash flow when the company must begin to seek external funding to meet its financial obligations
- Identifying areas of operations to reduce in the event of shortages or forced shutdowns
- Building relationships with lenders that can provide loans at better terms than average
- Working closely with the accounts receivable team to develop and improve strategies for turning invoices into cash
- Working closely with the HR and operations managers to develop a plan for an agile or hybrid workforce whenever possible
The Bottom Line
Businesses must innovate to prepare for increasingly complex risks. Consequently, it comes as no surprise that the role of CFO in modern times has evolved to include strategic risk planning. While CFOs head risk management initiatives, it’s important for them not to operate from information silos. A more collaborative approach ensures decisions provide immediate financial benefits and long-term improvement to all other business functions.
