Financial Analysis: A Controller’s Guide, Second Edition

Chapter 20. Analyzing Risk

Now that an abundance of topics related to financial analysis have been reviewed, it may have occurred to the reader that some of those analyses may have incorrect outcomes because the data used as input is incorrect. Not only does this lead to misleading management recommendations, but the controller also does not exactly earn a reputation for precise analysis work! To counteract this problem, the following sections delve into the specific cases in which risk must be factored into the analysis, the many ways in which risk can be measured, and how to report the resulting information to management in a form that it will understand.

In addition to the discussion of risk in this chapter, it may also be useful to review the section on risk at the end of Chapter 16. That discussion centers on the various formulas that are available through the Microsoft Excel electronic spreadsheet. The information in that chapter is supplemental to this one, with the primary emphasis on the tools one can use to measure the concepts noted here.

Incorporating Risk into Financial Analysis

Some of the financial analysis that a controller conducts deals with hard numbers, which are based on historical data. These data are completely verifiable, and so there is no reason for anyone to mistrust an analysis based on such data. Examples of this kind of financial analysis are ratios based on an income statement, inventory turnover figures based on an inventory report, or customer turnover ...