THOUGHT LEADER employing advanced modelling techniques to inform their strategies .
Monte Carlo simulations , once the preserve of quants and academics , have now become commonplace in corporate finance departments . Stress testing , mandated for banks in the wake of the financial crisis , is being voluntarily adopted by firms across sectors , eager to prove their resilience to shareholders and regulators alike .
The rise of artificial intelligence in finance has been particularly noteworthy . An Accenture study found that 76 % of banking executives believe AI will become the primary means of data interaction within the next three years . This technological revolution is reshaping how risks are identified , quantified , and mitigated .
How to conduct financial risk assessment Nick says that CFOs “ typically adopt a risk register with a traffic light system for evaluating risk . This would cover the full spectrum of risks ranging from the business-as-usual tactical-type decisions that you make to manage risk on a monthly basis , through to more strategic medium-term decisions about where to take the business to manage more fundamental risks such as the competitive landscape or developing technologies .”
First , CFOs need to understand the risks which are prevalent in whatever their business is and the market they face . Then they need to implement a risk control framework to manage those risks . And , from a financial perspective , have a budget or a plan and track performance against KPIs and metrics to show if the risk is manifesting in the business in different ways .
Evaluating transaction risk And then there are the risks involved in making a deal or closing a transaction , such as buying or selling a company .
When it comes to evaluating a risk on a transaction , a CFO undertakes due diligence to understand the risks and opportunities that a transaction presents them with . Often , they will bring in an external advisor to give them comfort and confidence in the numbers and help them evaluate the risks and opportunities , either costing the risk into the transaction price or contractually protecting themselves in share agreements .
Says Nick : “ There are various risk management strategies which CFOs adopt , ensuring advice is taken such that risks are priced or effectively managed through the transaction documentation .”
A holistic approach Fox believes that managing risk in a business requires a holistic approach , involving interaction across all members of the Board with the CFO sitting in the middle , interpreting these different risks as to how significant they could be financially . fintechmagazine . com 147