1 business risks
TRANSCRIPT
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Risk Management
Business Risks
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What is risk?
Risk is the possibility that an event will occur and adversely affect the achievement of an objective.
COSO ERM Framework
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Upside and Downside risk
• Upside– Opportunity
• Downside– Threat
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Underlying principles
– Every entity, whether for-profit or not, exists to realize value for its stakeholders.
– Value is created, preserved, or eroded by management decisions in all activities, from setting strategy to operating the enterprise day-to-day.
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Benefits of risk managementReduction in management time spent fire-fighting
Fewer sudden shocks and surprisesMore focus internally on doing the right things the right way
And therefore
Greater likelihood achieving business objectivesIncreased likelihood of change initiative being achieved
Strategy is appraised more effectively, leading to calculated risk taking
Hence
Greater confidence in moving into new areasOverall cost of risk is reduced
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Why Risk Management is Important
Risk Management supports value creation by enabling management to:
– Deal effectively with potential future events that create uncertainty
– Respond in a manner that reduces the likelihood of downside outcomes and increases the upside
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Strategic and Operational Risks
• Strategic– Relate to the fundamental aspects of the
organisation– Linked to the high level corporate objectives
and the strategic plan
• Operational– Relate to the day-to-day matters that could go
wrong
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Risk management process
Assessment Identification
Review Management
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Strategic and Operational Risks
• Strategic– Long-term– High level
• Operational– Short-term– Low level
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Factors contributing tostrategic risk
• Industry/market• State of the economy• Actions of competitors• Stage of product life cycle• Nature of product e.g. raw material• Gearing• New technology
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Operational riskDefinition – loss from failure pf internal business and control process
Includes• Internal control failure• Audit failure• IT failure• Loss of key personnel• Fraud
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Impact on Stakeholders
• Business risk can impact on stakeholders in a number of ways
• Shareholders– Fall in share price– Reduced dividend
• Directors– Loss of income (bonus)– Loss of reputation– Termination of office
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Impact on Stakeholders
• Managers– Loss of income (performance related pay)– Promotion opportunities reduced– Loss of motivation
• Employees– De-motivation– Loss of income (performance related pay)– Reduced promotion opportunities
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Impact on Stakeholders
• Customers– Poor product – could look for alternative suppliers– Loss of sales to retail market
• Suppliers– Loss of supply
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Impact on Stakeholders
• Government– Loss of taxation revenue– Unemployment
• Banks– Financial loss from loan defaults
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Common business risks• Financial
• Legal
• Technological
• Health & safety and environmental
• Reputation
• Business Probity
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Financial risks
• Currency risk– Exchange rate movements
• Transactions• Translation• Economic (competitiveness)
• Interest rate risk
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Financial risks
• Market risk– Movement in market value of an asset– Includes derivative risks
• Credit risk– Default/late payment of debt
• Liquidity risk – Company will be unable to pay its obligations
(cashflow)
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Legal
• Non-compliance with law and regulations– Fines/penalties– Loss of reputation
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Technological risks
• Physical loss/damage• Data and systems integrity• Fraud• Loss of competitive advantage due to
failure to introduce new technology
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Health & safety and environmental risks
• Failure to comply with legislation– Environmental – Health & Safety
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Reputation
• Loss of reputation caused by adverse consequences of another risk
• Examples– Poor customer service– Poor ethics– Health & safety
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Business probity
• Governance and probity within the organisation.