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1 business risks
- 1. Risk Management Business Risks
- 2. What is risk? Risk is the possibility that an event will occur and adversely affect the achievement of an objective. COSO ERM Framework
- 3. Upside and Downsiderisk • Upside – Opportunity • Downside – Threat
- 4. 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.
- 5. Benefits of riskmanagement Reduction in management time spent fire-fighting Fewer sudden shocks and surprises More focus internally on doing the right things the right way And therefore Greater likelihood achieving business objectives Increased likelihood of change initiative being achieved Strategy is appraised more effectively, leading to calculated risk taking Hence Greater confidence in moving into new areas Overall cost of risk is reduced
- 6. Why Risk Managementis 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
- 7. Strategic and OperationalRisks • 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
- 8. Risk management process Identification Assessment Review Management
- 9. Strategic and OperationalRisks • Strategic – Long-term – High level • Operational – Short-term – Low level
- 10. Factors contributing to strategicrisk • Industry/market • State of the economy • Actions of competitors • Stage of product life cycle • Nature of product e.g. raw material • Gearing • New technology
- 11. Operational risk Definition – loss from failure pf internal business and control process Includes • Internal control failure • Audit failure • IT failure • Loss of key personnel • Fraud
- 12. 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
- 13. 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
- 14. Impact on Stakeholders •Customers – Poor product – could look for alternative suppliers – Loss of sales to retail market • Suppliers – Loss of supply
- 15. Impact on Stakeholders •Government – Loss of taxation revenue – Unemployment • Banks – Financial loss from loan defaults
- 16. Common business risks •Financial • Legal • Technological • Health & safety and environmental • Reputation • Business Probity
- 17. Financial risks • Currencyrisk – Exchange rate movements • Transactions • Translation • Economic (competitiveness) • Interest rate risk
- 18. Financial risks • Marketrisk – 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)
- 19. Legal • Non-compliance withlaw and regulations – Fines/penalties – Loss of reputation
- 20. Technological risks • Physical loss/damage • Data and systems integrity • Fraud • Loss of competitive advantage due to failure to introduce new technology
- 21. Health & safetyand environmental risks • Failure to comply with legislation – Environmental – Health & Safety
- 22. Reputation • Loss ofreputation caused by adverse consequences of another risk • Examples – Poor customer service – Poor ethics – Health & safety
- 23. Business probity • Governanceand probity within the organisation.
Editor's Notes
- #5 Value is created by informed and inspired management decisions in all spheres of an entity’s activities, from strategy setting to operations. Entities failing to recognize the risks they face, from external or internal sources, and to manage them effectively can destroy value – in absolute or relative terms – for shareholders and other stakeholders, including the community and society at large. For companies, shareholders realize value when they recognize value creation and benefit from share-value growth. For governmental entities, value is realized when constituents recognize receipt of valued services at acceptable cost. Enterprise risk management: Facilitates management’s ability deal effectively with potential future events that create uncertainty . Provides the mechanisms to respond in a manner that reduces the likelihood of downside outcomes and increases the upside Enhances the ability to communicate value creation and preservation programs and goals, communicate with stakeholders, and deliver as planned, with few surprises.
- #7 Value is created by informed and inspired management decisions in all spheres of an entity’s activities, from strategy setting to operations. Entities failing to recognize the risks they face, from external or internal sources, and to manage them effectively can destroy value – in absolute or relative terms – for shareholders and other stakeholders, including the community and society at large. For companies, shareholders realize value when they recognize value creation and benefit from share-value growth. For governmental entities, value is realized when constituents recognize receipt of valued services at acceptable cost. Enterprise risk management: Facilitates management’s ability deal effectively with potential future events that create uncertainty . Provides the mechanisms to respond in a manner that reduces the likelihood of downside outcomes and increases the upside Enhances the ability to communicate value creation and preservation programs and goals, communicate with stakeholders, and deliver as planned, with few surprises.