Mitigating financial risk is an integral part of running a successful enterprise, even if most within an organization don’t fully know what it entails. That’s because risk management is often seen by some within an organization—executives included—as a process that is tedious and difficult to understand.
For this reason, many organizations need to redefine the approach they take to risk management and simplify the process. After all, risk management practices are only effective when an entire organization understands the full scope of the risks they are vulnerable to.
As the CFO of a company that provides performance marketing software and various marketing automation solutions—and as a CPA with a background in cybersecurity—I have firsthand experience spearheading financial risk management initiatives aimed at assessing and mitigating potential risks while improving workplace productivity.
Here are some key steps an organization must take to streamline its risk management practices.
Ensure Departmental Goals Are Aligned
A common pain point in financial risk management is when the goals of one department don’t align with the goals of another. This usually occurs when one department is more willing to take on financial risk than the other.
For example, an operations department may want to spend more on initiatives to generate revenue—thus taking on additional financial risk—whereas the finance department may not be willing to allocate those funds. Since the finance department knows the ins and outs of an organization’s finances, they are more likely to forgo additional expenditures so they can adhere to the budget already in place.
There are always risks involved when an organization takes on more expenses. The solution is to conduct a cost-benefit analysis for proposed expenditures to determine the amount of financial risk your organization is willing to take. Doing so will ensure that the goals of each department are aligned with the organization’s budget.
Differentiate Financial Risk From Business Risk
When it comes to financial risk, business leaders are responsible for managing their company’s debt and assessing how much money they stand to lose at a given point in time. Business risk, on the other hand, deals with generating enough revenue to cover operational expenses and spur business growth. Differentiating financial and business risk is important when determining which areas of business may require additional financing.
For instance, say your organization wants to gain exposure by having team members attend industry events and conferences, and the total cost to attend these events is $10,000. At this point, the finance and operations teams have to assess both the financial risk—adding $10,000 in additional expenses to the company budget—and the business risk—missing out on potential networking and partnership opportunities by forgoing the events—to determine which risk the company is willing to take.
Balancing financial and business risks is crucial for making better decisions and protecting a company’s long-term financial health.
Make Adjustments As Your Company Grows
As a company grows, adjustments have to be made to ensure its risk management practices can sufficiently protect against new potential risks.
As the head of a small company, you may need to create new policies that suit your growing operations when expanding into new areas of business. Internal controls may also have to be adjusted since small companies typically have one person in charge of decision making.
In addition to internal controls, managing risk for bigger companies requires more checks and balances. Business leaders have to take a 30,000-foot view of the company when it grows to get a clear picture of the risk management initiatives needed to identify and protect against new and emerging risks.
Final Thoughts
By continuously working to enhance their risk management practices, companies will be better equipped to make sound decisions and protect their finances.
In the end, managing financial risk is a balancing act based on how much risk your organization is willing to take and the potential benefits of taking on that risk.