Risk is a fact of business life. A big chunk of Companies' major responsibility of creating profits and shareholder value is occupied by taking and managing Risk. But current situation suggests that many companies neither manage risk well nor understand the risk they are taking.
The unfamiliarity of top management with Risk management is depicted by their handed down habit of focusing on simple performance metrics such as earning per share, net income or growth expectation on stock indices. Hence top management oversighting risk management and not integrating risk management into day to day decision making creates the greatest problems like unexpected and severe financial losses which results in volatile cash flows and stock prices and ultimately a bad reputation with customers, investors and employees.
"Risk" when undertaken creates shareholder value.Therefore, right strategy is to strike a balance that protects the company from financial distress and allowing space for entrepreneurship. Decisions consciously weighed against the risk, results in high returns. High returns here means the level of risk-adjusted returns with respect to risk undertaken.
And moreover companies can not only be safe but enjoys a competitive advantage that comes from taking on more risk more safely.
To understand risk and knowing what type of risk the company is facing is an important step of risk management. For a company risk can be put into four main catagories. first one is the Market risk that is adverse market price movements. second is the Credit risk where there is a possibility that borrower or counterparty might fail to honor its contractual obligations. Third type of risk is operational risk. It is an exposure to losses due to inadequate internal
processes and systems and to external events. And finally, Business-volume risk that is generated from changes in demand or supply or from competition and results in revenue volatility.
The unfamiliarity of top management with Risk management is depicted by their handed down habit of focusing on simple performance metrics such as earning per share, net income or growth expectation on stock indices. Hence top management oversighting risk management and not integrating risk management into day to day decision making creates the greatest problems like unexpected and severe financial losses which results in volatile cash flows and stock prices and ultimately a bad reputation with customers, investors and employees.
"Risk" when undertaken creates shareholder value.Therefore, right strategy is to strike a balance that protects the company from financial distress and allowing space for entrepreneurship. Decisions consciously weighed against the risk, results in high returns. High returns here means the level of risk-adjusted returns with respect to risk undertaken.
And moreover companies can not only be safe but enjoys a competitive advantage that comes from taking on more risk more safely.
To understand risk and knowing what type of risk the company is facing is an important step of risk management. For a company risk can be put into four main catagories. first one is the Market risk that is adverse market price movements. second is the Credit risk where there is a possibility that borrower or counterparty might fail to honor its contractual obligations. Third type of risk is operational risk. It is an exposure to losses due to inadequate internal
processes and systems and to external events. And finally, Business-volume risk that is generated from changes in demand or supply or from competition and results in revenue volatility.
1 comments:
I have always taken interest in RISK.It matters how the companies look at risks faced by them.Good post alltogether!!
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