What Keeps You Up at Night? Managing Financial Risks (Part 1): Identification & Assessment
Note: This blog is the first in a two-part series on managing financial risks to your organization, and focuses on identifying and assessing potential risks. Click here to read part 2.
As the head of a small business or not-for-profit organization, even when things are humming along, it can be scary to think of all the things that could go wrong. These can include a wide range of possible risks, including:
○ Client/customer/member issues, such as maintaining high-quality services
○ Personnel challenges, including staffing shortages
○ Ability to handle complex regulatory changes
○ Operational challenges, such as business continuity and information security
○ Financial vulnerabilities, including unpredictable cash flows and cost control issues
Just thinking of all the potential hazards can be enough to give one nightmares! However, rather than sticking your head in the sand and hoping things will go smoothly, you can be proactive and take prudent steps to manage your biggest risks. In this article, I’ll introduce the first step in an approach to manage your organization’s financial risks, which can also be applied to other types of risks you face.
What Is Financial Risk Management and Why Is It Important?
Financial risk management is a disciplined approach to identify and assess negative events that could threaten one’s business operations, and then minimize the likelihood and impact of those threats. According to statistics from the U.S. Small Business Administration, many small businesses don’t survive their first few years [see SBA Office of Advocacy report]. Therefore, investing time in financial risk management can help you beat the odds of financial failure.
How Should I Start? Identify Potential Risks
First, start by identifying potential financial risks (i.e., threats) to your organization. You’ll want to take a thorough look at the exposures to your business or not-for-profit. This will include not only risks related to your revenues, but also risks related to controlling expenses, managing your cash flows and operational issues that impact your finances, such as the secure back up and storage of your accounting information. In this early step of the process, write down potential risks regardless of whether or not you feel they currently are being managed sufficiently. In other words, start with a broad look at what financial threats could inherently occur in your operations. The list can be narrowed down later, but for now, you want to avoid missing anything important.
Where Should I Focus? Assess the Likelihood and Impact
Once you’ve identified and created a holistic list of potential risks that could impact your organization, assess each risk in terms of its likelihood to happen as well as the level of impact it would have. This process will help you prioritize potential risks that have the most negative impact if they were to occur. These are the ones you want to focus on at this time.
Once you’ve gone through these first two steps, you’re well on your way to implementing a disciplined risk-management approach. This is often the hardest part of the process, so congratulations! In next month’s article, I’ll cover what actions you should take to address your key risks, that is, implementing a risk-management plan.
If you have questions and/or would like to understand more about managing financial risks, please reach out to me, I’ll be happy to talk with you. Orin Schepps, Founder and CEO @consultanceaccounting https://www.consultancellc.com