Communicators involved in risk management communication know that reputation risk is a large area of company risk management, but often are not knowledgeable about managing financial risk. This article explains the principle of financial risk management so that communicators can discuss the whole area of risk management with senior management and clients.
Crisis events are a result of risks that are not well prepared for. It is not a matter of if crises will happen, it is a question of when they will occur.< No one is a perfect predictor of crises or totally immune. Just think of Covid.
According to PwC, nearly seven in ten (69%) leaders have experienced at least one corporate crisis in the last five years, with the average being three such crises.
In this article we dive into the common financial risks in business, the role of risk management and how to implement effective risk management strategies.
Common risks in business
Financial risks can catch any business off guard and understanding these risks is an important step to business success. Financial risk is the possibility of losing money on an investment or business venture. Three common financial risks in business are market volatility, economic downturns and unexpected expenses.
Markets are like a giant dance floor where prices dance to the rhythm of supply, demand, and investor sentiment. Market dynamics are the unseen DJs spinning tunes that make prices swing and sway.
An example of market-related risks is when your favorite tech stock value changes dramatically overnight. Market risks are the villains in this plot, causing stocks to dive due to sudden changes in the economy, competition in the marketplace, global events such as wars, volatility of oil prices and other external factors like Covid and inflation, and speculation about a public company’s forthcoming financial results.
Economic downturns may affect everyone. This means organizations feel the pinch too as customers spend less, revenues drop, and survival becomes a real challenge.
For example, during the 2008 financial crisis, companies like Lehman Brothers and General Motors in the US were in the center of that economic tornado. They struggled to stay afloat, and some didn’t make it.
Unplanned expenses can hit you like a rogue wave. Whether it’s a legal battle, a machinery breakdown, or a pandemic, these costs can crash your financial position.
Following risk management principles is like having a compass in the storm. Risk management helps you anticipate these financial dramas, prepare for the worst, and even turn challenges into opportunities. It’s not about avoiding risks; It’s about riding through them.
In the unpredictable world of business, effective risk management is your key to continued success. So, set your sails, keep an eye on the horizon, and let risk management be your guiding star in the vast ocean of business uncertainties.
The role of risk management in reducing financial risks
You can use software tools to assist with your risk management process. For example, Seon.io is one of the best financial risk management software tools.
Let’s dive into the world of risk mitigation and why your organization needs it for business success.
Risk mitigation is the process of reducing the impact and likelihood of potential risks. It’s about being proactive, not just reactive.
Imagine you’re playing chess, and instead of just focusing on your next move, you’re also scanning the board for hidden traps. That’s what risk management does. it identifies and analyzes potential pitfalls before they catch you off guard.
Risk managers play detective, spotting risks hiding in the shadows. It could be anything from market fluctuations to a sudden change in regulations. Once identified, it’s time to assess how severe this risk could be. What’s the likelihood of it happening? Risk management analyzes these factors to create a strategy to protect your organization.
Now, here’s the most valuable part. Following risk management principles isn’t just about avoiding disaster; it’s about ensuring continued success. By proactively managing risks, your organization is better equipped to adapt to changes, seize opportunities, and maintain financial stability.
Implementing effective risk management strategies
Risk assessment is the map that helps you identify what could go wrong, whether it’s market volatility, supply chain disruptions, or even a global pandemic.
It is important to prioritize risks based on severity. Not all risks are created equal. Some are like small waves, and others are full-blown tsunamis. Prioritizing risks based on their severity helps you focus your resources where they matter most.
Now that you’ve identified potential risks, it’s time to plan your defense – to develop strategies to minimize the impact of potential risks. For instance, if a key supplier goes out of business, having backup suppliers in place acts as a shield.
Think of risk mitigation as an investment. Allocating resources, whether it’s finances, manpower, or technology, towards preventing and managing risks fortifies your business in this uncertain world. What worked yesterday might not work tomorrow. Regularly updating your risk management plans is essential to improve your safe operations.
In the age of technology, real-time monitoring is essential. Whether it’s using data analytics, artificial intelligence, or monitoring business media news, having tools that give you immediate insights allows you to adapt to changing conditions swiftly.
By assessing, planning, and adapting to risks, your organization becomes more resilient and agile in the face of uncertainties.
Reputation risk and the importance of communication
Communication is a vital part of effective risk management. Not only is communication valuable in reducing financial exposure to operational risk, but it is essential in developing and implementing a reputational strategy. Reputation loss is a very general term, and under-estimated by many business leaders, but at its peak it has cost some businesses billions of dollars.
In simple terms, reputational risk can be defined as any gap between what your organization says about itself and what it is perceived to do. More formal definitions are like this one, which is based on HSBC’s definition: Reputational risk is the risk of failure to meet stakeholder expectations as a result of any event, behavior, action or inaction, either by the company itself, its employees or those who the company is associated with, that may cause stakeholders to form a negative view of the company.
Large companies like BP, Boeing, Samsung, Volkswagen endured various operational crises in recent years, and suffered billion dollar crashes in their value, arousing concern in the marketplace and with shareholders in particular. Smaller firms would have similar problems of painful loss of revenue in proportion when they suffer from reputational downturns.
Reputation contributes to more than half of the market capitalization of each of the top 10 US firms like Apple, Amazon, Alphabet and Microsoft. Apple’s market capitalization was worth $1.2 trillion dollars in 2021, and the reputation share of that was calculated at 57%, therefore valuing Apple’s reputation at $711 billion!
Major types of reputation risks
- Regulation breaches – failing to keep up with changes in laws and regulations.
- Cyber attacks – publicly known data breaches create a reputation for poor security and unreliable procedures.
- Employer communication about their employee experience – research shows only about 20% of what employers promote publicly about their employee work experience is matched by reality.
- Executive actions – The CEO and directors are the most visible human face of a company, and research has found the reputation of their leader is the fourth most important factor in determining the reputation of the company as a whole.
- Employee misconduct – Poor behavior includes being curt or rude to customers or clients, being known not to follow up about employee claims of sexual harassment, or when employees are arrested and publicly face court for theft, fraud, etc..
- Misleading advertising – Either internally/externally to recruit staff or externally in marketing campaigns, CSR actions, etc.
- Social media activity – Your organization may be perceived in a poor light in social media posts.
- Artificial intelligence (AI) – A business may not be transparent about its AI policy and ethical use of AI in its activities, such as spreading fake news, which may receive publicity in the news media, or rumors of a business using biased AI to evaluate job applications.
Internal risk management
Your team needs effective internal communication to ensure everyone is aware of potential risks. Whether it’s a shift in market conditions or a change in company policies, keeping your team informed is like providing them with a reliable map. Establishing clear communication channels within your organization ensures that critical information flows seamlessly, preventing misunderstandings and avoiding collisions.
Just as you keep your internal team members in the loop, your other stakeholders deserve to know what’s happening with the business at all times. Transparency builds trust. Whether it’s communicating financial challenges or strategic shifts, keeping stakeholders informed is like showing them the map of your journey.
Trust is the anchor that keeps your business grounded. Effective communication is the rope that ties that anchor securely. Building trust with stakeholders involves not just sharing information but doing it in a way that is clear, honest, and aligns with your organization’s values.
Following risk management principles without effective communication is like having a map without showing it to the crew. By integrating communication into your risk management strategy, your organization ensures that everyone is on board, aware, and ready to face whatever challenges arise.
Let communication be a crucial part of your risk management process. Embrace it – because it will unite your team – and watch as it creates opportunities for continued success.
Why Your Organization Should Follow Risk Management Principles for Continued Success
There are different seasons in business. We have times of calm and times of storms. Risk management is the key that keeps your business prepared for stormy times. It is important that you allocate resources to predict, analyze and reduce risks. The best time to implement risk management principles is when there is calm and all seems to be going well.
Risk management helps you assess internal and external factors in order to determine the potential impact of events on your business. After you have identified potential risks the next step is to take actions to mitigate against the impact of such risks. Therefore, it is important to apply risk management principles in order to ensure continued business success.