Dr B K Mukhopadhyay
Facing the Reality Every Time
In fact the global business environment today has become more complicated – so also global financial markets – much more uncertain than ever before. The global financial uncertainties were not entirely unanticipated, but, yes, the intensity was not predicted nor was the duration expected and the outlook is far more uncertain now for global situation than before.
As the matter stands today that business risk and financial risk are the two important areas that every management and finance personnel has to take into the fold. While business risk deals more with the strategic decisions of a company, it is financial risk that is related to the monetary aspects and debt. This business risk, in turn, is more related to the decisions in the context of smooth and profitable functioning of an organization [entering into an entirely new business, buying stake in a company, reducing the stake in a company, introducing new products in the market are the important aspects related to the business risk; as well as the issues regarding getting returns on assets of the company].
Can the decision maker just ignore crucial aspects like: the variability in demand for its products, variability in the input cost, operating leverage, variability of sales price? After all business risk – small or big – is governed by generation of cash to run the operations of the firm on a daily basis.
The very arena of business risk, thus, refers to a circumstance or factor that may have a negative impact on the operation or profitability of a given company. A business risk [sometimes referred to as company risk] can be the result of internal conditions, as well as a number of external factors [beyond the control of the company to set right] that may be evident in the wider business community.
Obvious enough: keeping in view the entire goings it is corporate governance area that invites proper attention on: formulation and implementation of required plans, policies and guidelines, code of conduct of directors, Chief Executive and Employees, mechanism to identify related parties, promoters, directors or senior management and lending to directors, chief executive, employees (except as per employees rules) and their related parties, if any.
So, the very need is here now to specifically attach importance to other related aspects as well: adequacy of the Management Information System (MIS), control in information Technology and related support function; reliability of mechanism used for reporting plus accuracy of such returns; compliance with the prevailing Statute, Act, Directive and Regulations, especially in vital areas like : profit appropriation to general reserve: appropriation to exchange fluctuation reserve, distribution of dividend and of course whether prohibited activities are pursued.
For example: the risk that a firm will go bankrupt because of lack of payment of debts is a big business risk. Competition with peer companies is also one of the major business risks faced by entrepreneurs. Competition can force business houses lower the rates of their products which can result into reduced revenues and net profits. Competition also causes a fall in the market share of the company due to the entry of new products. Poor management is a business risk which can be avoided by changing the board of directors. Enterprise risk management can be learned only after gaining sufficient experience.
Is it not that Financial Risk exists daily?
It is related to the structuring of the finances of an organization, which, in turn, will vary with the nature and type of investment especially when an organization decides to enter into debt from financial institutions for business expansion along with equity financing [rise in the interest rates can affect cash flows]. The ever changing foreign exchange rates, especially as being observed presently also add – fuel to the flame – to the financial risk for a company. Specifically, financial risks in international business are much more than those involved in domestic business. A continuous tracking of international markets environment can significantly minimise this financial risk.
Side by side: the ongoing business environment calls for countering concentration risk as well. Concentration may arise in a particular market, industry, region, tenor or trading strategy. It is well known that diversification is one of the cornerstones of risk management. A professional risk-taking enterprise has to limit the concentration of their exposures to prevent any one event having significant impact on their capital base. So, planning for future has to take into account these stern realities.
Practically speaking, a natural tension exists between pursuit of an institution’s core competencies and competitive advantages into profitable market segments or niches that produces concentration, and their desire to diversify and exposures!
In fact: financial sector policies and instruments are required to be constantly rebalanced to respond not only to financial markets, prices and overall stability considerations but also to developments in real sector especially , trends in growth across sectors, regions and sections of population.
Alternate ways are to be tapped since it is crystal clear that tinkering around the already travelled areas cannot give rich dividends simply because of the fact that the call of the contemporary age relates to pure business and nothing else – a highly complex situation where keeping pace with demand is itself a much harder task compared to even a decade back. Talent and people development emerges to be the biggest challenge for the business world, especially for the new incumbents.
Risk Minimization Would Continue To Occupy Central Place
Mechanism followed to minimize liquidity risk are all important – use of GAP Analysis and other mechanism to measure and manage interest rate risk and the mechanisms to minimize foreign exchange risk is to be looked into, especially among others. Institutions are to assess the effectiveness of risk-conscious internal control system In fact, this arena calls for assessment of the vital aspects like: effectiveness of the audit committee; effectiveness of the internal Audit Function; rectification of the deficiencies identified in the audit reports; adequacy of the controls in credit operation / controls exercised; adequacy of the controls in Treasury operations, adequacy of the controls in Branch operation; adequacy of the controls in procedures related to expenditure as well as adequacy of the control over fixed assets.
After all the main risk which all kinds of businesses face is that of the under performance of the economy of a nation. If the economic growth slows down, then naturally, the business will grow at very slow pace or may even come to a standstill.
At the micro-level one will be able to emerge as a successful business leader only if one can deal with the risks in an effective manner. Big or small – good risk management abilities are a must to take your business to the top.
In this 21st century business it is all about mitigating the risk and as such the age belongs to successful risk managers who could locate, measure, control and manage the risks over a period of time.
So, risk is where the business is!
Responding to Risk is Possible
Avoidance…eliminating a specific threat, usually by eliminating the cause
Mitigation…reducing the expected monetary value of a risk event by reducing the probability of occurrence
Acceptance…accepting the consequences of the risk – often accomplished by developing a contingency plan to execute should the risk event occur
The Writer, a noted Management Economist and an International Commentator on Business and Economic affairs, can be visited at email@example.com