Time to think about financial business risk management
26 February 2024 •
It’s always been seen as good practice for a business to have a risk management framework in place to help mitigate key risks. Now, with the ever-changing political and economic landscape, experts are urging businesses to prioritise risk management in order to safeguard their operations and ensure long-term stability.
What is business risk management?
Risk management involves considering potential risks to a business and how it might navigate these and protect its interests. One example would be recent rapid advances in AI which could be seen as a threat to some businesses, on the other hand it could be turned into an advantage. The important thing is that it is flagged up, considered and an appropriate response put in place to mitigate potential risks.
Three key areas of risk
Strategy, liquidity and markets are three of the key areas to be considered.
Strategic risk relates to earnings and profitability arising from strategic decisions. It encompasses changes in the external environment and in business conditions including the political, legal and macro-economic environment. Events such as COVID and Brexit might fall under this area of risk as might any sort of technological advancements that might impact the business.
Liquidity risk looks at whether the company will be able to meet its liabilities when they fall due and ensuring it has sufficient funding and support to continue in business.
Larger companies also need to think about IFRS9, which is not sector-specific, impacts a wide range of entities, and applies to all companies reporting under FRS 100 and FRS 101. IFRS9 calculates provisions for credit losses, focusing on the risk that a receivable will default rather than whether a loss has been incurred, and therefore includes requirements to use forward-looking information.
Market risk takes into account the financial markets, for example changes in interest rates or exchange rates and how these might impact a company. This is often more relevant to larger companies dealing with multiple currencies and large amounts of loans.
People risk is another market risk that should be considered. This involves assessing and mitigating potential risks related to employees such as: availability of staff, turnover of staff and talent retention. Putting strategies in place to address these issues, such as running training programmes, fostering a positive organisational culture, and considering succession planning, can enhance employee satisfaction and loyalty and help mitigate people risk.
How can Warrener Stewart help
Risk management frameworks are often reviewed at the point that the business is being audited. Senior Manager, James Shepherd, a member of the audit team at Warrener Stewart, said; “It’s crucial that we obtain a thorough understanding of a business entity and its environment in the planning stage of any audit. Identifying areas of higher risk, and considering how these could potentially impact the business, helps inform a robust risk framework. We always check that a framework is up to date and comprehensive and, importantly, that it is being adhering to.”
If you want to know more about business risk management or find out how Warrener Stewart can help check the framework you have in place, call us on 020 7731 6163 or email info@warrenerstewart.com