Posts

planning

Long Term Planning for Companies

With all public companies having a 75% decline since 1965 on their return of assets, we can see that the current approaches are not working. While most companies have until this point remained loyal to a 5-year plan, others have chosen a 3-year program. Some daring companies have gone so far as to have no long-term plan at all and simply respond to events as they happen, minus any long term planning.

Unfortunately, the results have shown that these companies are spreading themselves too thin and even the largest of companies are realizing that the number of new programs is far more numerous than the available resources. They also recognize that the initiatives are happening in small strides due to limited resources and responses to short-term events.

Fortunately, however, there is another process based on a very successful planning approach. It’s called zoom-in/zoom-out and CFOs, as well as other executives, should embrace it to make a strategic impact that can prepare for the long term. 

Zoom-Out/Zoom-In Focus:

  • Zoom-Out 10-20 years
    • Helps with a long-term projection from which you can work backward to identify steps to take to reach the long-term goals.
  • Zoom-In 6-12 months
    • Identify current or short-term goals that can help to achieve long term ones. Identify things to cut and ways to free up and maximize existing resources. 

This is not your typical 5-year approach. Companies using this planning method believe that staying the course and looking at these two time-points is the best way and that everything will work out if they stay focused.

A theoretical exercise becomes real and sets steps for companies to work differently to build a vital path to reaching their long-term projection. The goal is to focus on the top 2 or 3 highest-impact assessments for the next 6-12 months while giving the proper amount of resources.

This method closely aligns the idea that if both long-term and short-term goals are closely aligned, the middle will fall into place. This allows executives to have focus and to keep from spreading resources too thin for things that may not work out. It also reduces the risks of being blindsided and could radically change the market.

Common objections:

That the future is too uncertain

This approach focuses on predictable factors to avoid uncertainty.

Investors only want short term results

Be persuasive in explaining that future opportunities and short-term goals aimed at attaining future earnings can be better for their stock.

It takes too long to receive the payback

This strategy has the potential to improve near-term economic performance and reduce short-term disruptions while giving a more unobstructed view of the future. 

The zoom in zoom out process combines and amplifies the two competing goals and prepares the future while making an achievable impact in the meantime.

For more long-term planning tips, check out Forecasting: Optimizing Business Planning

risk accounting

Risk Accounting Can Improve Your Profits

Within a generation, the advances in technology have undergone dramatic changes. The world is growing more interconnected thanks to electronic data and information networks. Meanwhile, globalization and new technologies have lead to supply chain vulnerabilities and unexpected losses.

A CFO’s worst nightmare is having to explain to their CEO or board members, why they were not able to identify and stop excessive risk exposures before they turned into losses.

Exposure to risk is generally associated with failures related to defective or incorrectly priced products and services. As was the case with the losses experienced by financial institutions through 2007-2008. Those unexpected losses were attributed to the incorrect pricing of subprime mortgages.

With that worry in mind, astute accountants should ensure that their accounting standards and reporting practices are keeping pace with the latest changes occurring in the risk landscape.

In recent years, supply chain, cyber, financial, and other risks have grown monumentally, driven by advances in technology; increases in the complexity of financial products; greater operating dependencies on globally interconnected data and information networks.

A Misalignment Between Finance and Risk

With accounting standards such as IFRS and GAAP aiming to ensure that enterprises maintain an objective view of their financial situation, there is a misalignment in that there are no equivalent standards to apply towards risks.

This is precisely what academics have been trying to resolve with their codification of the new accounting technique that they are calling “risk accounting.”

How Can Risk Accounting Help?

Risk accounting begins with enterprise risk management (ERM) operating within a standard system and using a shared risk metric to express all forms of risk.

One of the first steps with risk accounting is identifying the exposure; this sets up the proper equations for classification and analyzing data. 

In management reporting, codes are assigned to transactions that uniquely classify the customer, product or location. In risk reporting, additional codes are given to be used for calculating the risk-weighted value of each transaction.

The 3 Standard Factor Tables of Used to Calculate Risks:

  1. The product risk table which provides risk-weights based on product characteristics such as complexity, toxicity, and decomposition.
  2. The value table which converts profited amounts based on the accounting records and scaled value band weightings.
  3. Scoring templates to calculate the risk mitigation index based on the key risk indicators.

After the risk-weighted factors have been determined and calculated, they are then calculated in the 3 core metrics for each risk type.

  1. Inherent Risk
  2. Risk Mitigation Index
  3. Residual Risk

By combining account and risk values at the transaction level, the fabrication of finance and risk reports is enabled. This gives managers the most present information needed for risk mitigation initiatives with the calculated improvements in RMIs and reduced residual RUs.

The RMI is the standard measure of risk cultures blending risk properties from across the company. With risk accounting being an extension of management accounting, risk appetite can be gauged in RMIs and residual RUs. They could then become an essential part of a firm’s budgeting and planning cycles, which, in turn, would constitute an actual ERM system.

For more information regarding financial risk controls, check out The Increased Demand for Financial Controls

pace of change emerging risk

The Pace of Change is Now a Top Emerging Risk

With the rapidly changing business landscape, companies are growing concerned over their abilities to keep up, due in part to their own weak digitalization strategies.  In a Q2 survey taken of 133 senior executives across different industries, we can see that the pace of change is a top emerging risk. 

Accelerating privacy regulation was the previous quarter’s top emerging risk and has now become an established risk after ranking in the 4 previous reports, as well.

Two operational risks are closely linked with the concerns around the pace of change:

  1. Weak digitalization. Executives communicated their concerns regarding poor digital budgets and a high failure rate for digitalization projects as well as the ability to scale projects and potential project delays.
  2. Digitalization misconceptions. Two out of 3 digital transformation projects fail to achieve their objectives. Increasing the focus on digital projects can help to reveal the companies weaknesses, and by learning with an incremental approach, the organization can learn at scale, with limited risk.

These two risks may be driving the concern about the pace of change and other related threats from business model disruption. 

Organizations are worried about the pace of change and the state of being exposed to disruption. Another driving concern around the pace of change is the fear of being disrupted by more agile competitors and having a lack of clear paths to follow to encourage growth. 

Leaders should insert themselves as early as they can into the strategic planning process and collaboratively work together with their finance teams to encourage a change in steps and other positive risk-taking.

Risks can materialize through:

  • An increase in the numbers of new innovative competitors 
  • A failure of the brand proposition not meeting the client’s needs or demands
  • Executives not responding to the macro trends
  • The needs of consumers constantly changing

Overview

Make sure you are in control of your company’s pace of change rather than letting it control you. By automating processes and hiring the right employees, your company can fuel it’s own growth at a manageable speed for everyone.

For more industry insights and news, check out our DLC Blog.

ipo preparation

IPO Preparation Tips

Many companies have decided to go public due to the healthy stock market. However, going public is a major decision and there is a lot that goes into IPO preparation. How can you be sure it is the right path for your company? Companies need to thoroughly evaluate their ability to handle the ins-and-outs of being a public company before jumping in. It requires that management is able to immediately meet shareholder and market expectations from the first day. Including addressing compliance and regulatory requirements, operational effectiveness, risk management, periodic reporting, and investor relations.

Companies must create an extensive IPO plan that balances the short-term objectives with long-term goals and allows for the coming rush of real-time reporting required of a public company.

Time-specific issues in IPO Preparation

Investor Relations

The C-suite executives should launch a promotional campaign providing investors and financial analysts the opportunity to ask them questions about the company. This campaign should include revenue, outlook, net income and operating cash flows. This process should be done as early as, while the SEC is reviewing the company’s Form S-1.

Upgrade Financial Reporting Platforms

It’s imperative to upgrade to an automated financial-reporting solution that is scalable and easily integrated with other systems, including budgeting and forecasting, enterprise resource planning and customer management. As manual accounting, budgeting and general ledger upkeep are prone to errors and are time-consuming.

Processes and Controls

Prior to going public, it is important to perform a risk assessment to discover high-risk gaps. Along with the CFO, the CEO, accountants and legal team should all review the risk assessment.

Is 2019 Your Year to Go Public?

Finding the perfect time for a company to go public is very difficult. As of right now, many experts feel that 2019 is a great year. But just because this year is good, it doesn’t mean that the next one will be. With the markets continually changing, your best bet is to get all of your company’s accounts and documents in order in case you decide to take the leap.

DLC’s Accounting and Finance Consultants are uniquely positioned with a comprehensive set of skills to guide you through the planning and execution of your IPO.