Managing risk is a vast endeavor, not easily understood. Hampton (2011, p. 2) describes that “one large corporation identifies 2,100 business unit risks and 800 common risks across all business units” in his assessment of financial risks. For the current project, we will focus on financial risks and organization risks.
Diebold, Doherty, & Herring (2010, p. 1) indicate that for being successful, risk managers must be “constant grappling with the known, the unknown and the unknowable.” The authors think of the ‘unknowable’ as a conceptual framework to improve decision-making: managers have to recognize and contrast situations that are ‘known’ and ‘unknown’, but remain ever aware that boundaries are uncertain and subject to modification. With that in mind, we must consider that ‘cookbook’ approaches to risk management must be taken with care, as risk comes from unexpected places.
Financial risk can be broken down into many smaller aspects that have to be accounted for, such as foreign exchange risk; liquidity risk; cash flow risk; debt risk; credit risk; interest-rate risk (Hampton, 2011, p. 1-2). Each one requires a specific response. For instance, “when it is a question of purely financial risks such as foreign exchange risks or interest rate risks, active risk management is of paramount importance and is usually reported by a large body of mathematical and computer models” (Oshins, 1989, p. 70). On the other hand, cash flow risk can be handled with precise controls and plans to ensure money will be available when needed. Debt and credit risk require constant monitoring and evaluation of the company’s ability to pay and of the financial health of customers.
Organization risk has to be analyzed and suited to the organization in question. A large corporation, with many layers of managers, will have a tremendous risk of miscommunication in the line of command as there is a ‘loss in quality’ of top-down orders. Smaller companies, on the other hand, tend to have employees or managers with overlapping functions, leading to two problems: issues that are left alone (‘someone else will handle it’) or issues that employees tackle simultaneously, generating attrition. Organization risks are commonly controlled with the formal definition of tasks, accountability, and organization structure.
Most importantly, risks have to be understood, listed and classified, and this monitoring has to be periodic. As Diebold, Doherty, & Herring (2010, p. 1) pointed out, a proper risk management system has to handle the known, the unknown and the unknowable.
References
Diebold, F. X., Doherty, N. A., & Herring, R. J. (Eds.). (2010). The Known, the Unknown,
and the Unknowable in Financial Risk Management: Measurement and Theory
Advancing Practice. Princeton, NJ: Princeton University Press. Retrieved from
Questia.
Hampton, J. J. (2011). The AMA Handbook of Financial Risk Management. New York:
AMACOM. Retrieved from Questia.
Oshins, A. H. (1989, December). Managing Financial Risks across Borders Can Be
Chaotic. Risk Management, 36(12), 70. Retrieved from Questia.
