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Risk is good
There are a variety of different risks that businesses have exposures to. This means that there are also numerous methods and tools for managing risk. Management of risk enables different outcomes. It can be described as a form of insurance. It will pay out in some form or another if a certain set of events occur.
The likelihood of these events will vary. Some will be inevitable. Others will be remote and unlikely. Some risks could simply be ignored. Others will pose such a threat that they must be managed. So who decides what happens next?
Ultimately the Board and executives of the company must define which risks are to be managed; which are to be ignored and which are accepted as part of being in the business. Many will then communicate these risk management policies to shareholders and stock analysts.
Opportunity for treasury
The treasurer will be used to addressing financial risk. But treasury also has the skills to go further and should get involved in enterprise risk management. In particular treasury can bring financial analysis and modelling skills to help the organisation identify and manage risk where it is appropriate to do so.
Risk management should be a central part of the strategic management of any organisation. It is the process whereby organisations methodically address the risks attached to their activities. Treasury should play a part in that process.
The Institute of Risk Management defines a successful risk management initiative as being:
Proportionate to the level of risk in the organisation.
Aligned with other corporate activities.
Comprehensive in its scope.
Embedded into routine activities.
Dynamic by being responsive to changing circumstances.
But that is not all: ‘Risk management is the assessment of significant risks and the implementation of suitable risk responses. The objective is to achieve maximum sustainable value from all the activities of the organisation. Risk management enhances the understanding of the potential upside and downside of the factors that can affect an organisation. It increases the probability of success and reduces both the probability of failure and the level of uncertainty associated with achieving the objectives of the organisation.’
‘Risk management should be a continuous process that supports the development and implementation of the strategy of an organisation. It should methodically address all the risks associated with all of the activities of the organisation. In all types of undertaking, there is the potential for events that constitute opportunities for benefit (upside), threats to success (downside) or an increased degree of uncertainty.’
We could not have put it better ourselves.
Read on for more information on the risks that treasurers should be looking at and the techniques that can and are being used to address these risks.