FSI RISK MANAGEMENT WORKSHOP

1. Risk Training Session

2. DEALING WITH FINANCIAL RISK
Building A Financial Control System
Uade Ahimie
April 19, 2023

3. Content
• Objectives
• Key definition
• Risk Types
• Financial Risk/Controls
• Conclusion
• Questions & Answers

4. Dealing with Financial Risks: Building Financial Controls and Systems
Objectives: By the end of this session, participants will be able to:
• Define financial risk and identify the types of financial risks businesses/organizations
face.
• Explain the importance of financial controls and systems in managing financial risk.
• Identify the key elements of an effective financial control system.
• Develop a plan to implement effective financial controls and systems in their
business/organization.
Objectives

5. Key Definitions
Risk
Risk implies future uncertainty about deviation from expected earnings or expected
outcomes. It measures the uncertainty that an investor is willing to take to realize a
gain from an investment.
It is the combination of the following
 Probability of an event occurring
 The impact of its consequences
1. Where such events have a negative impact – it is called Risk
2. Where such events have a positive impact – it is called Opportunity
Either way, they can affect the value creation or wipe out the value of a company.
Financial risk is a form of risk which refers to the potential for a company or business
to experience losses or negative impacts on its financial position or performance due
to various factors or events. These risks can come from internal factors which are
within the control of the business and external factors which the business has no
control over

6. Key Definitions
Enterprise Risk Management
Enterprise risk management (ERM) is a methodology that looks at risk
management strategically from the perspective of the entire firm or
organization. It is a top-down strategy that aims to identify, assess, and
prepare for potential losses, dangers, hazards, and other potentials for harm
that may interfere with an organization's operations and objectives and/or lead
to losses.
 Enterprise risk management (ERM) is a firm-wide strategy to identify and
prepare for hazards with a company's finances, operations, and objectives.
 ERM allows managers to shape the firm's overall risk position by mandating
certain business segments engage with or disengage from particular
activities.
 Traditional risk management, which leaves decision-making in the hands of
division heads, can lead to siloed evaluations that do not account for other
divisions.

7. Financial Risks Types
Financial risks include the following types
1. Market risk: This refers to the risk of financial loss
due to changes in market conditions such as
fluctuations in
 Interest rates
 Exchange rates
 Commodity prices
 Stock prices.
Market risk can affect the value of an
organization's investments, assets, and liabilities,
as well as its profitability and cash flow.
2. Credit risk: This refers to the risk of financial loss
due to the failure of
 Customers
 Borrowers
 Counterparties,
to fulfil their financial obligations, such as
defaulting on loans or failing to pay invoices.
Credit risk can impact an organization's cash flow,
profitability, and overall financial stability.
Market Risk
Credit Risk
Operational Risk
Foreign Exchange Risk
Interest rate Risk
Regulatory Risk
Liquidity Risk
Credit Risk
Credit
Concentration
Causes
Credit Issuing
Process
Customer
Performance

8. Financial Risks Types
3. Operational risk: This refers to the risk of
financial loss due to internal operational failures,
errors, or deficiencies within an organization,
such as
 Fraud
 human error
 system failures
 legal and compliance risks.
Operational risk can result in financial losses,
reputational damage, and legal liabilities for the
organization.
4. Liquidity risk: This refers to the risk of financial
loss due to an organization's inability to meet its
short-term financial obligations or fund its
operations efficiently. Liquidity risk can arise from
factors such as
 insufficient cash reserves
 inability to access credit
 disruptions in financial markets
and can impact an organization's ability to
operate smoothly and meet its financial
obligations on time.
Market Risk
Credit Risk
Operational Risk
Foreign Exchange Risk
Interest rate Risk
Regulatory Risk
Liquidity Risk

9. Financial Risks Types
5. Foreign exchange risk: This refers to the risk
of financial loss due to changes in exchange
rates
• when an organization engages in international
transactions
• holds assets or liabilities denominated in
foreign currencies.
Foreign exchange risk can impact an
organization's cash flow, profitability, and
financial statements.
6. Interest rate risk: This refers to the risk of
financial loss due to changes in interest
rates, particularly for organizations that have
• significant borrowings
• Investments, that are sensitive to changes in
interest rates.
Interest rate risk can affect an organization's
borrowing costs, investment returns, and
overall financial performance
Market Risk
Credit Risk
Operational Risk
Foreign Exchange Risk
Interest rate Risk
Regulatory Risk
Liquidity Risk
Interest rates
Confidence/
speculation
Relative
inflation rate
Exchang
e rate
Rate of
Growth

10. Financial Risks Types
7. Political and regulatory risk: This refers
to the risk of financial loss due to
changes in political or regulatory
environments, such as changes in
• Government policies
• Regulations
• Laws
that can impact an organization's
operations, profitability, or legal
liabilities.
Political and regulatory risk can vary by
country or region and can have
significant implications for an
organization's financial stability and
performance.

11. Financial Controls
Financial controls enable an organization
to determine the direction, allocation,
and use of its financial resources. Thus,
the company can make sensible spending
decisions by maintaining financial
accountability based on its objectives
consistent with its existing situation and
forecast.
Effective financial management planning
aids the company in mitigating financial
risks, complying with fiduciary duties,
corporate governance, and due diligence
requirements, and achieving financial
goals. Its absence can have an impact on
budgeting, operations, and performance.
The first step is to assess the
company’s current
performance in terms of
sales, profitability, and cash
available.
The next step is to detect
anomalies in budgets,
financial reports, and balance
sheets that could prevent the
company from achieving its
goals.
Further, it requires correcting
discrepancies and deviations
in financial accounts to bring
the business operations back
on track
Then comes regularly
updating all of the
information, including
resource management
policies and procedures, in
financial documents.
The next stage necessitates a
thorough examination of the
organization’s operational
policies, such as profitability,
expenses , and production
volume.
The next phase is to improve
operating standards and
decision-making processes by
ensuring sales, profits,
surpluses objectives are met.
Finally, it requires making
forecasts and setting goals for
different scenarios based on
the above steps, including
investment and production
planning.
The following is a step-by-step approach for implementing a
financial controls checklist in a business:

12. Cash flow maintenance
Effective financial control procedures provide a
significant contribution to an organization's ability
to maintain its cash flow. The overall cash inflows
and outflows are monitored and planned for when
an efficient management mechanism is in place,
which leads to effective operations.
Resource management
The efficiency of an organization's operations is
largely dependent on its financial resources. The
other resources required for running a firm are
made available by financial resources. So,
managing financial resources is essential for
managing all other resources. For a business to
ensure resource management, effective financial
control procedures are therefore essential.
Importance of Financial Controls

13. Operational efficiency
An organization's overall operational effectiveness is
guaranteed by an efficient financial control mechanism.
Profitability
Every organizational department will operate without a
hiccup if an organization's overall operational efficiency is
maintained. Thus, it raises productivity, which has a direct,
favorable relationship with profitability. As such, putting in
place efficient financial control methods ensures that
the business becomes more profitable.
Fraud prevention
Financial control protects an institution from fraud by
acting as a preventative step. By keeping track of the inflow
and outflow of money resources, it can aid in the
prevention of any undesirable actions like employee fraud,
cyber theft, and many other kinds.
Importance of Financial Controls

14. Financial control system
The elements of financial management include the following

15. 1. Planning
In this stage, the business goals and
objectives are properly established and
steps that align with these goals and
objectives are identified. Financial
management is required in each of these
steps which includes financing, budgeting,
allocating roles, customer research, etc.
2. Controlling
After the establishment of business goals
and objectives, it is important to make
sure that all employees are aware of them
and of their roles in achieving these goals
and objectives. This can be controlled by
setting appropriate KPIs that can
quantifiably lead to achievement of
organizational goals.
Financial control system
The elements of financial management include the following

16. Financial control system
3. Organizing and directing
Making decisions on the necessary
resources to effectively carry out the plans
is as important as setting the plans
themselves. Resources here do not just
refer to material assets and tools, they
include staff, roles, budget, funding,
outsourcing services, technology and
software. These resources need to be
organized and gotten ready before plans
are carried out.
4. Decision making
Once alternatives and potential plans have
been established, choices must be made
on the alternatives that are feasible and
matches business goals and objectives.

17. Conclusion
Financial risk is an important risk type every business must consider
whether it is an existing business or a startup. This is important because
financial resources play an important role in ensuring the smooth
running of other aspects of an organization and should be duly
monitored.

18. Questions
&
Answers

19. THANK YOU