Accounting News

Thursday, May 31, 2012
Managing Risks II

Last time we talked about the various types of risks that a company faces. Failure to plan for internal and external risks. For a private company that means angry owners and investors. These may be small companies who don't feel like they have the resources need to do a risk audit. But this a function that you can work on in partnership with your accounting team. Some basic steps can make all the difference in the event of a larger risk.

For a public company it can cause significant impacts to the stocks value. So it is reasonable to expect that they are managing for risk. However, that is not always the case. ValueBridge, a risk consulting firm, did a study of why large public companies missed their revenue forecasts. They looked at S&P 500 companies that missed estimates by more than 5%. Since every public company tries to be conservative with estimates so they can beat them and be heroes to shareholders this is a significant miss.

The biggest risk factor cited in their filings or public calls was operational risks. These risks accounted for 32.9% of the companies. As you recall these are internal risks to the company. External risks (strategic risks) were 31.6 % of the explanations for an earnings miss. These are more understandable because they were external to the company and can be harder to manage for.

An interesting risk was weather that came in at 17.7%. Some companies consider the risk they have from weather but there isn't a company that has no exposure to weather. A mild winter in the mid-west and northeast helped many companies but hurt others. Sales of winter clothing were down and vacations to warmer climes dried up. So weather changes in another part of the world spreads across the globe.