The Process of Performing Corporate Financial Risk Management

In running a business, we will not always be faced with profits for profit alone. The process, of course, includes competition from similar businesses to failure factors that can be a scourge for every businessman. This is where the importance of risk management. Corporate risk management is important to increase company value by controlling financial risks that may occur.

The main objective of performing financial risk management is to reduce potential losses that may arise due to unforeseen events. This business risk can be caused, among others, by the value of currency, credit, commodities and equity. In addition, there are other business risks that may occur, such as regulatory risk, tax risk , accounting risk, liquidity risk, and market discontinuity. For that, you must understand correctly the definition of risk and risk management by carrying out corporate financial risk management.

Supervision, control and management functions

Generally, the risk management system used by many large companies is a three-line defense approach, which consists of supervisory, control and management functions. In the first line of defense, it is the Business Operations unit that is responsible for identifying, assessing, monitoring and managing risks. In essence, the unit's activities are managing daily risk exposures to match the target market and policies that have been set.

On the second line of defense, there are the Corporate Risk Management Division, the Financial Control Department, and the Law and Litigation Department. They are responsible for the independent supervisory function. Then, in the third line of defense there is the Internal Audit Department which has the right to test and carry out audit risks on the processes carried out by the business and operational units.

These are some of the basic concepts of the risk management process. To implement these three lines of defense in your daily tasks, you can carry out the following management strategies:

1) Make a plan

This plan varies, which can be tailored to the needs of your company. There are several things that you can describe in this risk management planning list , such as a risk list, an assessment of each risk based on trends that occur and its consequences, an assessment of controls, and an action plan.

For example, suppose your company is engaged in e-commerce . So, you should create a risk management strategy if your server crashes and causes your site to become temporarily inaccessible. Does this trend occur very rarely or frequently? Does it have a big impact on your company? The bigger the number given, the higher the resulting risk. From this list of risks, you can make a plan by considering the steps to be taken and their effectiveness.

2) Determine how to handle risks

When an illustration of each event has been made an action plan, the next thing you can do is determine how to handle the risk. In a risk management scheme, there are four main strategies, namely avoiding it, reducing it, moving it, or accepting it. Each strategy has its own advantages and disadvantages. You may choose one method or you may end up using all of them.

Avoiding risks can be one of the most effective ways, especially when dealing with risks. By stopping activities that are likely to cause major problems later on, you cut off opportunities for losses. If reducing risk is the way you go, you are making measurements that cause less harm. This strategy is suitable for a wide range of risks. For risk transfer strategies, this has more to do with the existence of guarantees. For example, home assets are protected by a home insurance policy.

Then, the final strategy is to accept it. Risk management always has a price. Avoiding risks can reduce company profits. Reducing the risk can cost you more for a new process. Transferring the risk will also make you pay more guarantees. In cases where the risks are likely to be low, it is best to accept them.

3) Monitor

Planning is certainly not enough because you also have to supervise to ensure that your financial risk management strategy is working and working well. Regularly monitoring your business to identify and deal with new risks is an equally important step as well. Monitoring company finances can be started from having a good system.

4) Monitor and communicate risks

The implementation of financial risk management in the company will likely bring its own changes. You are obliged to monitor these changes in the company. Identify how employees accept these changes, whether their reactions tend to be positive or negative. Also monitor whether the implemented solutions have managed to overcome these financial risks. In addition, you must also ensure that any financial risk management process is always communicated or reported to parties with an interest in business activities in the company. This is important to ensure that the goals or targets of risk management are successfully achieved and remain in line with the company's interests.

A good system must be a system that is simple enough, easy to apply, and can monitor all your financial activities comprehensively.