What is really effective risk management today?
Risk management based primarily on data from the past is outdated. Future risk management will use smart algorithms and massive amounts of data to predict financial trends. Today, risk management is going through a tipping point: CFOs know that change is inevitable, but they cannot achieve it.
Vapiano, a popular German restaurant chain with branches all over the world, experienced a cash flow crunch in 2019. Almost every day, there are reports of companies running out of cash. Often these are companies that have not proven themselves or are in danger of collapse and are eventually swallowed up by another society.
But this was not the case with the Vapiano series. The problem was the imbalance between growth and daily business, as well as between investment and profit. In these turbulent times, the challenges to successful risk management remain high. In the case of the Vapiano series, it was the poor financial situation and the coronavirus pandemic that swamped the company. In March 2020, I filed for bankruptcy.
However, it is these volatile times that also present financial managers with a positive element. Improvements in analytical and predictive models are constantly accelerating. Thanks to big data, a huge amount of data can be analyzed intricately, with more accuracy it can be predicted. Early identification of risks also means that you can find opportunities at the right time and use your entire business model.
You know about it, but you don’t follow it – don’t use effective methods
use them! The truth is that CFOs still use technology relatively little in their day-to-day work. Our study of “(R) Evolution of Risk Management” revealed that half of the companies still struggle to distribute master data within their businesses. The infamous “power of data” hampers not only improvements in daily business, but also risk management.
Another stumbling block is that most CFOs and auditors interviewed believe that they are not familiar with technology issues. This is surprising when you consider that the job description of a financial controller requires some evidence-based pragmatism. But in this case, as in many other professions, people are afraid of technology or are afraid to replace it.
But the opposite is true. As evidenced by a number of companies using digital business models to overcome significant challenges and become industry leaders because they do things differently. A recent study published by McKinsey found that 50 percent of employees are currently involved in business operations, particularly invoicing and payment reminders. And only 15 percent work with analytics. According to McKinsey, by 2025, this percentage will almost reverse. Four to ten controllers will analyze the data to predict future events, and only a quarter of the employees will be involved in business operations. The machines will take care of the rest.
The survey found that the vast majority of managers work with their own analytical tools
The biggest challenges for credit managers
The biggest problem was the day-to-day management of partnerships, suppliers and customer relationships.
“The nature of business risks today is that it changes almost every day.”
Eric Doodle, Global Head of Business Credit at Dun & Bradstreet
Thus, the second major hurdle for credit managers has been to make accurate forecasts. Other major obstacles include:
Improve cash flow, increase profits, and integrate data. The survey found that, according to respondents, more than half of them are small and medium-sized businesses, the main risk being the loss of potential customers or important suppliers, whether due to technological collapse or bankruptcy.
How do CFOs see external threats to their sector?
The factors leading to uncertainty have not diminished in recent years. The survey found that for the shy two-thirds, the situation is no more threatening than ever. Slightly more than a quarter of respondents showed greater uncertainty. This was largely related to external factors that their society had no control over. These include global and trade policy, as well as technical disintegration. For financial managers, the pace of innovation has also been a cause for concern.
Data and experts – inevitable struggle or not?
Despite their awareness of the risks and their importance, it is still difficult for financial managers to decide which direction they want to take in the future. But CFOs must be leaders in the growth of the company. Because while the main directions of development are clear, whether or not the company will remain profitable often depends on a few smaller cost factors. As seen with the Vapiano series.
60% of important data is still stored in private partitions and silos, but efforts must be made to integrate it with the rest. 50 percent of managers admit that their company’s data flow isn’t working well. And up to 58 percent use only their own analytics tools.
The combination of Data Recovery and Custom Development Tools can be fatal: it slows down analytics. Do you think many companies can still handle traditional Excel? But it’s not the smartest way to predict.
Only 40 percent of companies surveyed have their own data infrastructure, and only 20 percent make full use of this infrastructure.
The biggest surprise is the discovery that financial managers know that their behavior and the way they calculate risk actually poses a risk to the growth of a profitable business. Obviously, most managers are well aware that due to the large variety of data, forecasting models can no longer be developed manually.
Follow our three recommendations:
- Don’t think of constant changes as a risk, but rather as an opportunity. Those who can interpret the data quickly and accurately will be better at work in the long run.
- Invest in tools and solutions: This may seem like a waste of time at first, but gradually the resources will be freed up that can be better used in strategic financial management.
- Develop the expertise of your financial team by prioritizing the strategic growth of the company and ensuring that management trusts it.
If you, as a CFO, Credit Manager, or CFO, see ongoing change in a positive light, you can use data-driven results to bring your business closer to reality and pave the way for sustainable growth.
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