This post involves internal controls.  Risk management involves more than financial issues, but is often the responsibility of the CFO.  From a broad perspective, the CFO must consider several factors:  risk identification; risk quantification issues; and risk planning.

               The first step in risk management is to determine which risks may be most applicable to the firm’s business.  Several sources can be utilized to identify important risks.  One excellent source of risk identification is the firm’s own industry.  This information can be gathered from company operating personnel, competitors that have suffered losses, and public filings of competitors that are publicly held.  Analysis of adjacent industries can also identify risks that could affect the company.  In addition, the study of suppliers with operating problems can make the CFO aware of additional risks.

               Some risks can initially appear to be so vague that it may not seem possible to assign any value at all to them.  Such risks include reputational damage, customer boycotts, and a decline in perception of the firm’s brand.  One potential means of quantifying such risks is to examine the plight of other companies that have experienced the same of similar challenges.

               Other risks are considerably easier to quantify, since a specific action should result in a tightly defined cost or range of costs.  For example, a firm encountering reputational difficulties may need to factor in the costs of lobbyists, extra security personnel, and an advertising campaign.  We caution against reliance on entirely on a financial model, particularly if the model’s output does not appear to match real world results.

               Once the risks have been identified and quantified, three major decisions are required.  One is to mitigate the risks through operational action.  Another is to accept the risk.  The third is to transfer the risk to an insurer.  In addition, the risk planning must be fully factored into the firm’s capital investment planning.  Finally, we advise that several plans of action be developed when the occurrence of a negative event appears to be highly probable.

               Risk management involves more than financial issues, but is often the responsibility of the CFO.  From a broad perspective, the CFO must consider several factors:  risk identification; risk quantification issues; and risk planning.

               Capitol CFO Solutions serves clients in Washington, D.C., Maryland, and Virginia.  Please contact us for a free consultation.