FAQ'S
Why is risk management critical?
Risk management is important for businesses because it maximizes their chances of achieving their objectives. Risk management focuses on what matters most to businesses, to improve decision-making. It is forward-looking and works as an early warning indicator. Managing risks lowers uncertainty to tolerable levels – within the context of enterprise risk management. Without effective risk management, good governance is not possible.
How can businesses integrate risk management into their strategic financial planning?
Businesses can integrate risk management into their strategic financial planning by gaining knowledge of the type of risk before making any strategic decision. Risk analysis helps to identify the risks of a business – to assess how risk impacts the goals of an organization. Risk analysis enables businesses to effectively change strategies – which may include the adoption of new policies, including governance frameworks, based on the following risk-mitigating steps.
- Strategic objectives decomposition.
- Identifying factors associated with uncertainty.
- Performing risk analysis.
- Turning risk analysis into actions.
Step 1
In the first step, your risk managers must decompose your high-level financial strategic objectives into more tactical, operational key performance indicators and targets. This critical step helps risk managers understand the business logic behind each objective and helps to make risk analysis more focused.
Step 2
Once the strategic objectives are broken down into more tactical and manageable pieces, your risk managers are required to use the strategy document, financial model, and business plan, to determine key assumptions made by management. Most assumptions are related to some form of uncertainty and for this reason, require risk analysis. The risk analysis framework helps to avoid unrealistic management assumptions – including management overlay.
At the same time, risk managers should perform a classic risk assessment to determine if all significant risks were captured in the management assumptions analysis. By the end of the second step, risk managers should have a list of management assumptions – and if possible, a rationale for each assumption, and materiality effects. For each management assumption identified, risk managers should work with the process owners and internal auditors and utilize internal and external resources to determine the ranges of possible values and their likely distribution shape.
Step 3
In this step, a scenario analysis is performed to assess the effect of uncertainty on your company’s strategic objectives. Risk analysis must be performed within the existing budget. When modeling risks, it is critical to think about the correlations between different assumptions. There are various tools for performing an in-depth risk analysis and identification of interdependencies. This helps to determine the causes and consequences of every risk.
The outcome of risk analysis helps your risk managers determine the risk-adjusted probability of achieving strategic objectives. It also helps them determine the key risks that may negatively or positively affect the achievement of goals.
Step 4
Here your risk managers discuss the outcomes of risk analysis with your executive team to see whether the results are realistic, reasonable, and actionable. If the results of risk analysis are significant, then upper management, with the help of the risk managers needs to change, update, or revise the risk management strategy either fully or some portions of it. This will ultimately lead to the finalization of the risk strategy. Later, risk managers will work with the internal audit team to determine whether the risks identified during the risk analysis were controlled and if the agreed risk mitigations were implemented as expected.
FAQ's
Yes, it is economical. Studies have established that any investment in risk management leads to fewer losses and enhanced decision-making, which thus leads to better overall performance.
Risk criteria are the terms of reference against which the level of a given risk will be assessed in an organization. They vary from one organization to another and depend on the objectives and priorities of the organization.
A financial risk is the possibility of losing money or not achieving the expected financial outcomes due to factors beyond the control of an organization. Such risks can occur in any financial transaction, including investment in stocks, mutual funds, or bonds, taking a loan, or starting a new business. There are various kinds of financial risks, including market risk, liquidity risk, credit risk, systematic risk, and operational risk.
Model risk validation helps to check if there are any inconsistencies in each risk management model and if such a model is being used in the wrong contexts. So, the model and purpose can be changed accordingly, modified, or replaced to enable more accurate and effective model risk analysis. The analysis thus helps organizations to avoid or reduce the financial losses that may result from faulty insights obtained from the assessment of wrong models or wrong contexts and faulty decision-making and planning based on the insights.
The financial consulting firm you hire to perform an internal audit of your organization will provide you with a team of financial experts for this purpose. They have deep knowledge and experience of the financial processes, practices, technological tools, etc. used across various industries. Therefore, while performing the internal audit, they can better identify and critically assess the financial risks that may affect your organization’s financial stability and growth and provide you with useful insights on how to manage, resolve, or reduce the risks. This ultimately will enable you to make the right decisions and make the right strategies and plans for managing the risks.
A financial consulting firm invests its time and resources in training and updating its experts about the latest compliance and regulatory laws. So, they are well versed in performing the various processes, procedures, and practices for maintaining compliance and regulatory laws. When you seek their services, they will take the necessary steps to ensure your organization effectively complies with compliance and regulatory standards. This consequently lowers or minimizes compliance and regulatory risks at your organization.
Financial risks are ever present for any organization. A financial consulting firm like Leka Research Institute can help you effectively monitor these risks by assisting you in the creation of appropriate risk monitoring structures, developing digital risk monitoring systems, regularly checking your financial records, monitoring, analyzing, and reporting any irregularities in your financial operations, processes, transactions, investments, etc.
The financial specialists of a consulting firm will help your organization achieve financial governance in these ways. They will help you create a policy that guides upper management in building design about the financial objectives of the organization. The plan mainly relates to the operating revenue and costs of your organization as well as its cash flow management.
In addition, independent consultants are versed in creating policies that establish the basis for the overall well-being of your organization – including assets and liabilities management. Moreover, the specialists will help you build monitoring processes that provide you with sufficient financial information to ensure your finances are being appropriately managed to achieve your organization’s short-term and long-term goals. This includes establishing key performance indicators and benchmarks for performance evaluation. This also includes establishing a framework that provides your management and staff with a reporting system that enables them to report financial information in an accurate and timely manner.
Financial risk management practices are a set of practices recommended, used, implemented, and supervised by the experts of a financial consulting firm for banks. These practices help banks in effectively identifying, analyzing, evaluating, prioritizing, and monitoring each risk encountered by any organization. These include credit, market, operational as well and liquidity risks etc. Implementation of these practices helps banks gain insight into the bigger picture of the risks. Accordingly, they can make and implement the strategies and plans promptly for managing, controlling, or minimizing the risks. As a result, banks can reduce or negate the impact of the risks, thus leading to minimal losses caused to them and improvement in their financial performance.
If these practices are not used by banks for risk identification, assessment, monitoring, and treatment of various risks, the impact of the risks will be more on the banks, which will result in more losses and a dip in their financial performance.
How can effective risk compliance identify errors in a bank before they become significant problems?
While performing their various tasks and operations, banks need to adhere to certain laws and regulations. Failure to follow these laws and regulations can lead to the imposition of monetary penalties, operating restrictions, bad publicity, and lawsuits. To avoid such undesired scenarios, banks need to perform regular monitoring and testing of various compliance risks and issues. Due to their vast knowledge of financial processes, practices, tools, etc., financial experts of a financial consulting firm can effectively perform compliance monitoring and testing processes in banks. By implication, they can identify and assess any compliance risks and issues faced by banks early and they can accordingly get banks’ upper management to take necessary measures to resolve, rectify, or mitigate the compliance risks and issues.
Model validation is a periodic process that is performed by the experts of a financial consulting firm to assess and review if the risk assessment models are performing as intended. If they discover any deviations in the output of these models during the review, this gives them the understanding that either the models are incorrect or misapplied, or they are giving a wrong output due to non-tested assumptions.
To resolve the weaknesses and limitations, model validators often recommend actions to the banks to make qualitative adjustments to their models. If the weakness and limitations cannot be resolved, the experts recommend the banks’ management opt for new and more accurate risk assessment models. If the experts discover during the review that the risk management models are giving the output as intended, then they conclude that these models are reliable and effective to use.