Forecasting Assignment #2
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Forecasting Assignment #2
Globally, increase in complexity, volatility and interconnectivity creates uncertainty in business planning which is not good for a long run. CFO's pressure has increased from investors, boards, and financers to enhance and manage the balance in risk-return of the company and to plan and forecast the volatility in time to manage it timely. Risk adjusted forecasting is used to create more certainty in budget targets and projections. Planning and forecasting are useful for companies who care about the future investments to avoid systematic and unsystematic risks.
The basic forecasting of risk adjustment creates a various range of probabilities and outcomes based on multiple risk variables in spite of a single variable. To address interconnected risk the expanded view help the companies, some of the interconnected risks had been identified previously whereas others maybe not noticed. Strategic planning is also improved by the methodology because it can facilitate executive for a good understanding of capital allocation, asset performance and profitability by setting cushion against risk.
According to Henry Ristuccia, Governance, global leader,Deloitte Touche TohmatsuLimited, Risk and compliance services; ‘As compared to Traditional forecasts and plans the output of risk-adjusted is more useful and insightful , which create single point metrics and estimates with no or little possible variances and discussion of risk, without presenting correlation among multiple risks'. He notes several areas of risk the expectations of given executives increased volatility, the most helpful tool is risk-adjusted forecasting which helps them to get ready for such risk.
According to Malcolm Wilkinson, a Coworker at Deloitte LLP in the U.K., who had supervised the Finance Business Partnering practice “In an enterprise the approach is to leave the plans and forecast that are produced by “best guesses' aggregation deprived of focusing on risk that creates important impact on performance such as talent shortage, competitors actions, regulatory pressure, and volatility. Mostly there is a very small process integration between strategic planning, risk management, budgeting, and financial forecasting. Further, he adds "Planning and forecasting more integrated approach is becoming important to make profitable growth and remain sustainable in such a volatile environment".
Data is another problem in traditional inputs in the forecast which is typically based on intuition and experience and sometimes it includes varying assumptions. Normally companies do not stress about their forecasts but when they do, it tends to be focused and limited on a sole generic parameter such as demand, price and input cost.
The critical review of the article suggests that information about financial markets is incorporated in prices and any change in one market causes changes in another market. Studies suggest that markets are interdependent upon each other and information transfer in these markets. As evident from the review of extant literature, the presence of volatility transmission among different countries regionally and globally and utilize a variety of different methods and models. Forecasting is important for the business to avoid unexpected circumstances. There are many methods and techniques which are used by the businesses for avoiding these risks(Hyndman& Athanasopoulos, 2018).
A profitable business needs to know about future expectations and it is only possible if CFO's are having enough knowledge and experience to apply useful techniques for avoiding those risks. Companies need to make proper strategies to hedge those systematic and unsystematic risks. The consumer confidence can always be increased on businesses who are using the latest techniques and methods to avoid risk and the businesses which are efficient in risk management(Hribar& Yang2016). In the future, more research is required to find the techniques for risk management.
Hyndman, R. J., & Athanasopoulos, G. (2018). Forecasting: principles and practice. OTexts.
Hribar, P., & Yang, H. (2016). CEO overconfidence and management forecasting. Contemporary Accounting Research, 33(1), 204-227.
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