How to Communicate Risk Better to Your Board
3
minutes
As a CFO, one of your primary responsibilities is to manage and communicate risk. Sometimes, it can turn CFOs into real control freaks. Setting the right boundaries is the key to creating a plan that optimizes your financial performance.
Good CFOs understand that there is no opportunity to succeed without taking risks. It is as simple as it sounds, without risk, you have no chance to grow, and if the risk is too high, you might fail catastrophically. The best CFOs are the ones who know when and how to accept risk in their business, when to dial it back, and, most importantly, understand that risk is a balancing act.
Many CFOs are sometimes uncomfortable with this subject because they might anticipate some reactions from the board. “Will they think we are not pushing enough?” or “Will they be afraid of the numbers in my plan”?
First of all, every board knows that risk is part of the plan. What they are trying to do is get to where the risk is in your plan and how they can work with you to best manage that risk. The best way to have a conversation about risk is to define the parameters of your confidence based on the key assumptions and drivers in your business backed up by data.
Another significant input to include is to talk about the individual components of risk associated with those assumptions and drivers - and where you are on that spectrum. Once you have a clear picture of the risk strategy and its financial possibilities, you can start developing a communication strategy.
Be transparent: It’s essential to be upfront about risk strategy. This way, stakeholders can trust you, and you can talk about challenges rather than trying to downplay them. No board wants you to come in and say, “my plan is risk-free.” They won’t believe you. If you come in and say your plan has risks, but you have the answers to the questions you lay out, they’ll be more comfortable letting you take that risk.
Risk is a shared responsibility: In a finance department, everything is interconnected. It’s critical that you can explain your decisions and how they impact the big picture so that your team will be on board with you. Communication is key here. You need to make sure you are aligned with every stakeholder and that you speak in the same language.
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Anticipate their questions: by considering different scenarios, you’ll have a foundation to explain your numbers and the underlying assumptions. You had to ask yourself and your data numerous questions while you and your team were building the plan - walk the board through your methodology and choices and explain your numbers as storytelling.
Show as much data and possibilities as possible, driving different scenarios with a possible answer to each of them. Make sure you highlight the metrics the board can track so they can understand how to measure progress against your plan. It will be key to set their expectations on how and when you can change course if things aren’t tracking to your assumptions.
Be positive: Focus on communicating the steps to mitigate the risks and how you’re positioned to weather the storm. Start by showing the parts of your plan that are rock solid, your bedrock. And then talk about the things that are increasing risk, always clarifying the reasons that will make sense for the company to accept and take these risks.
They wouldn’t be in your plan if you didn’t have a good reason for them.
Be timely: adjust to real-time communication. Regularly update your stakeholders and keep them informed so they can plan accordingly.
Conclusion: Communicating risk gets easier when providing multiple scenarios with transparency. You can help ensure that your stakeholders have the information they need to make educated decisions and work together with you to weather the storm.
Science can help us spot risks and find optimized courses of action, based on future plans and actual real-time data.
fintastic uses Monte Carlo simulations to map potential probable future paths based on simulations on a given financial model. This yields a given-plan statistical risk, uncovers vulnerabilities, and suggests changes to plans to mitigate them, like a machine-generated risk-adjusted hiring plan.
Fintastic is a complete FP&A solution that uses probability science and risk-derived planning to give actionable insights and recommendations.
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