financial risk

In part one of this series, Approaches to Risk Management: The Basic Concepts, we recommended you analyze your business risk management program from 7 major aspects. Beyond these basic concepts, some academic authorities suggest the following as necessary considerations in the development of a formal Risk Management Process as well.

Assets & Exposures – it all starts here. What exactly are your company’s risks and exposures? Look at everything and think outside of the box.

Measure the Risks – qualitative and quantitative analysis for severity – probably loss and estimated maximum financial loss from each occurrence and for frequency – probability of loss occurring. Be in a position to identify problem areas…this is only possible if you have devised a way to analyze your loss information.

Control the Risks – both before loss and after loss. Be in position to limit or mitigate exposures via loss control methods before the loss occurs…that way anything that falls through the cracks can be addressed as part of the post loss evaluation to limit repeat occurrences.

Finance the Risks – how are losses to be paid for? Transfer it to an insurance company or to your balance sheet? Think about it.

Risk Administration and Communication – this involves the implementation and monitoring of the risk management program. Who is going to be assigned to oversee this?

There are many sub-components to each of the categories, which can be considered after these fundamental issues have been evaluated. This subject matter is complex. There are many “moving parts”. Below are a few select areas that certainly rank high for additional review and deeper digging.

1. Operational Risks – Manufacturing, sales, labor, supply lines, distribution lines, shipping, storage, inventory, advertising, internet and web site usage and disposal of waste to name a few.
2. Exposure to Business Income Interruption – It is all about the potential for the flow of income being interrupted. Every business has its own unique exposure based on the way they individually conduct business. The question becomes, how can those operations become interrupted? Important point – it’s not just your business but it is those businesses that you rely on to sell to or to receive goods from in order for you to continue your business process.
3. Physical Risks – these are the risks you face when you own, lease or rent property. What are the exposures that are faced under each scenario?
4. Financial Risk – Here you are considering such things as cash flow, financial markets, credit risk, lending, liquidity and being over-leveraged or under-leveraged. These issues all play a part in determining how a proper risk management program should be set up.

The important point to illustrate here is that there is a process to be followed and to give you something to think about. As you can see, there is more to it than getting renewal policies and putting them up on a shelf. What was discussed in this and the previous blog is referred to as the traditional “silo” approach to risk management. In our next blog, we will look at another approach to risk management…Enterprise Risk Management (RM).