What financial risk management measures do you use in your company? If you haven’t implemented any yet, you’re exposed to significant risks: an unexpected event could jeopardize the viability of your project. Perhaps, after reading this introduction, you’re wondering what risk management is. It involves identifying, analyzing, and quantifying the probability of incurring secondary losses and negative effects caused by disasters.
It also involves defining and establishing preventive, corrective, and mitigating actions in this regard. In other words, it aims to put the necessary measures in place to prevent such events from occurring and, if they do, to know how to respond in order to mitigate and minimize their effects. Having a control plan and an effective program in this area is increasingly important, as it can prevent serious financial disruptions in the event of an incident.
1. Who needs an effective program to manage their risks?
What would happen if one of your investors or lenders stopped providing you with the agreed-upon periodic payments? What if one of your factories or warehouses caught fire? Imagine that your innovative, newly launched flagship project fails: would you be prepared to handle it?
Understanding what risk management is represents the first step toward becoming aware of these kinds of unforeseen events. As Jean-Jacques Rousseau anticipated: “A very necessary foresight is to know that one cannot foresee everything.” Therefore, having a monitoring and action plan to manage risks is essential.
In reality, all companies need to invest time and resources in financial risk management—including yours. When an unexpected problem arises, having invested in financial risk management makes all the difference—the difference between survival and closure.
In particular, banks and insurance companies must have excellent financial risk management policies in place. It is also advisable for companies that provide long-term financing to their customers.
Don’t hesitate: invest in a risk management program and plan to strengthen your business. Heed Rousseau’s advice: recognize that you cannot foresee everything.
2. What steps are involved in implementing an effective financial risk management program?
Once you understand what risk management is, it’s time to take action. The best decision is to implement a specific, customized program.
Software capable of recording, analyzing, and monitoring the financial situation—both at the corporate level and for each specific project—is a great help. Among other features, it generates monitoring reports illustrated with indicators, tables, and graphs that make them easier to understand. It also provides segmented analyses of the profitability that is being achieved or could be achieved.
1. How do you implement a financial risk management program?
Remember: when you identify threats to your company’s resources early on, you’re avoiding the possibility of incurring millions in losses.
Having a solid control plan and managing this aspect properly benefits you in four ways:
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Good reputation.
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Greater credibility in the markets.
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Increased company stability.
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Minimization of catastrophic consequences.
Here are the steps you should take within your organization to implement risk management through a robust program:
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Create a customized framework based on your business activities: products, employees, marketing, security, customers, regulations…
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Review and monitor the required information.
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Identify all risks: hiring, performance, continuity, acceptance, services provided…
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Put the situation into context based on your specific circumstances.
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Communicate, engage, and consult on an ongoing basis. The stakeholders involved are numerous and diverse: employees, customers, suppliers, partners, auditors, consultants…
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Set deadlines for your program.
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Consider the risks and invest in training. Often, these risks can be reduced or avoided through sound decision-making. Training is just as important as prevention; it is an integral part of it.
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Conduct periodic assessments of the situation and how it is evolving. Analyze the past and present on a regular basis to anticipate future situations.
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Keep a record of your policies, procedures, processes, and assessments. This information is invaluable for guiding your future actions.
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Delegate and distribute responsibilities. At least one person should be specifically tasked with monitoring this information and potential risks.
Apply these guidelines and don’t hesitate: commit to financial risk management to avoid surprises.
