The Benefits of Choosing a Career in Risk Management

What is risk management:
Risk management is the process of identification, assessment and treatment of risks that seeks to minimise, control and monitor the impact of risk occurrence through the cost effective utilisation of resources.

Where does risk management apply
Risks occur in every walk of life, in every industry and in every service delivery enterprise, both private and public sectors. The severity of risks occurring depends upon many factors. In order to quantify such severities most organisations traditionally employ some sort of risk processes to assess the likelihood of risks occurring and their perceived or calculated impact. This enables risks to be prioritised and resources applied to meet the overall best interests of the organisation and its internal and external stakeholders.

Risks, great and small
In today’s connected and integrated world risks and their impacts can and do translate across international boundaries. No longer are they confined to departments and within individual companies. Economic boundaries and geographical structures are such that companies now need to assess risks in a world where a volcano in Iceland can cause the closure of a manufacturing plant in Japan.

Equally at the individual organisation level the importance of undertaking health and safety risk assessments in order to protect the health, safety and welfare of it’s employees is a legal obligation for many companies. Product manufactures will undertake design risk assessments in order to ensure that the ultimate users are protected from any safety related design hazard.

Local authorities are required to ensure that they provide safe highways and passage for the general public. For example, they will need to assess the amount of sand and grit they will need to ensure they can cope with the pressures of harsh winter weather to protect the individual motorists and the unsuspecting pensioner on an icy pavement.

All of the above and in many more private and public sector industries and services there is the basic requirement for someone or some persons to identify a potential risk, to evaluate the likelihood of the risk occurring and to calculate the impact or consequence of the risk in order to best minimise its impact.

Risk management – does it work?
Armed with the knowledge that risk is everywhere but that there are robust systems and processes to manage them is it safe to say that such systems and processes work?

Certainly there are many examples of where risk management has worked. If the available systems and processes didn’t work then they simply wouldn’t be used. Risk departments and risk mangers would be unlikely to exist and an irresponsible attitude to risk would likely be prevalent.

Risk management however does not work in all cases. It’s impossible not to be tempted to assert that the BP oil well catastrophe in the Gulf of Mexico could have been prevented if the risks had been fully evaluated. Similarly the lack of controls to adherence of risk processes that has resulted in global financial problems has been laid at the doors of some of the worlds largest financial institution and banks.

Another dimension to risk management
With the proliferation of risk management tools, the use of highly complex modelling techniques and experts and specialists in their fields of expertise, why is it that risks of the magnitude and scale noted above, to the trip hazard on the local pavement, to the vulnerability of the child in a local authorities occur?

It is simply that risk management is not just about rules and regulations. Successful risk management needs a culture and a set of values that ensures that it becomes part of an organisations DNA. If corporate culture is perceived as resentful towards those who raise risks then any risk process is useless. People will hope that the problems just go away. The culture must allow for honesty and openness that allows for maximum benefits to arise from the tools and modelling techniques.

Why choose a career in risk management?
Risk managers and people whose job it is to minimise the occurrence of risks are experts in their field. Their value contribution to any organisation is immense. Qualifications in risk management for some specialised industries – for example insurance – is sometimes necessary and will certainly add to an individuals self marketing capability. However a large number of active risk management individuals do not consciously set out on a career path of risk management. They some how stumble in to it. At this point there is a choice. Do you stick with the tools and techniques or do you grasp the risk agenda and take it forward? The emergence of enterprise risk management aligned to systems thinking; the inescapable link between successful risk intelligent organisations and culture; the in depth knowledge of an organisation and its independencies are immeasurable assets in a world where some have developed a low tolerance to risk. A career in risk management can be as dull as it can be exciting. The choice is yours.

But remember, risk is about taking the opportunity to grow, expand and compete more effectively. Without risk, there is no reward – for the organisation or for the individual.

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Strengthening the CFO’s Role in Strategic Risk Management

Strengthening the CFO’s role in strategic risk management to lead Capital intensive business in market volatility

Capital Intensive Businesses

Capital-intensive business exists with lower margins. Management is always expecting Return on Capital Employed (ROCE) above the cost of capital. The major businesses are Oil & Gas, Infrastructure, Construction, IT etc.

Market Volatility Challenges

Market volatility, ceaseless pressure on margins and demanding stakeholders increase the difficulties of thriving in an increasingly interconnected, interdependent and unpredictable global economy.

Many organizations have yet to adapt to this new state of the economic landscape. Doing nothing is no longer an option – they need to adjust and take action now.

Many organizations are now transforming their businesses to strengthen their organization to save costs, create more client-centricity, restore stakeholder confidence and/or embed new business models.

For many organizations, long-term success depends on the success of these transformation programs. To make it more challenging, the margin for error continues to be small, and the environment in which transformation needs to happen continues to increase in complexity.

Strategic Risk Management

• It’s a process for identifying, assessing, and managing both internal and external events and risks that could impede the achievement of strategy and strategic objectives.

• The ultimate goal is creating and protecting shareholder and stakeholder value.

• It’s a primary component and necessary foundation of the organization’s overall enterprise risk management process.

• It is a component of Enterprises Risk Management (ERM), it is by definition effected by boards of directors, management, and others.

• It requires a strategic view of risk and consideration of how external and internal events or scenarios will affect the ability of the organization to achieve its objectives.

• It’s a continual process that should be embedded in strategy setting, strategy execution, and strategy management.

Identifying concrete steps for CFOs to increase involvement in risk management for investment decisions

Concrete Steps to Increase the CFO’s Involvement in Risk Management

• Build a tight link between risk management and other Business Process

• Lead a corporate-level discussion of Risk Preference, Focusing on Risk Choice and select optimal mix

• Use Risk Analytics to communicate investment and strategic Decisions

Build a tight link between risk management and other Business Process

• Focus on foresee issues which will emerging in the future instead of current issues.

• On the basis of prioritization a guidelines to be issued for which Business performance metrics would be effected.

• Business Planners conduct adhoc analysis of upside versus risk, focusing most, if not all, of other attention on a single “Center Cut” scenario.

• Highlighting exactly where and how risk will affect the Business Plan

• Incorporating systematic stress testing using macro scenarios which will reflects possible impact on financial planning

• Applying probabilistic “financial at risk” modeling for major investment decision these efforts. (Cash in hand vs cash needs)

Lead a corporate-level discussion of Risk Preference, Focusing on Risk Choice and select optimal mix

• It is critical to have clear answers to the following questions before making decisions:

o What is the company’s competence in the market?

o Are the decision makers familiar with the risks involved including the tail risks and understand their potential impact?

o Is the company capable of surviving extreme events?

• Risk appetite articulates the level of risk a company is prepared to accept to achieve its strategic objectives.

• Risk appetite frameworks help management understand a company’s risk profile, find an optimal balance between risk and return, and nurture a healthy risk culture in the organization. It explains the risk tolerance of the company both qualitatively and quantitatively.

• Qualitative measures specify major business strategies and business goals that set up the direction of the business and outline favourable risks.

• Quantitative measures provide concrete levels of risk tolerance and risk limits, critical in implementing effective risk management.

Use Risk Analytics to communicate investment and strategic Decisions

• CFO plays an important role in financial and strategic aspects of investments and the evaluation of major decision. He leads the discussion and rival proposals and solutions and often hold powerful decision rights.

• Major Projects with value at stake comparable to total risk from current company operations are discussed and decided with qualitative list of major risks.

• The CFO is ensuring by defining right set of core financial and risk analytics to run for each option to ensure this value stake is brought to light and debated.

EXAMINING LEADING PRACTICES APPLICABLE TO CFOS THAT CAN AUGMENT A COMPANY’S FINANCIAL HEALTH

Best Practices applicable for Company’s Financial Health

CFO have several options to compete more effectively in the Risk Management decisions. Improving returns starts with rethinking where to play-and with four strategic steps that many companies often overlook when it comes to improving performance.

Where to play: A more profit-focused portfolio

• The most pressing issue for leadership teams in capital intensive industries is whether to stay in businesses in which margins have been relentlessly driven down. Many companies are choosing to exit low-profit businesses that once were considered to be core. As they rebalance their portfolios, they are migrating up the value-added chain, investing in related sectors where new technologies can provide competitive advantages.

• Profit pool mapping is an important tool for assessing whether and where it makes sense to do business. In heavy industries, management teams often are so focused on volumes and tonnage that they overlook where the biggest profit pools are. By understanding the sources and distribution of profits across their industry, companies can gain an inside edge on improving returns.

• The premium end of the business typically represents a very large proportion of the profit pool. The best opportunities often cluster there for companies competing in capital-intensive industries.

• Picking the right place to play in the value chain is also critical to improving returns-and the most profitable spot varies across industries.

Best Practices applicable for Company’s Financial Health How to win: Four strategic steps to improving returns

1. Improve the cost base and review capex continually –

• In capital-intensive industries where low returns have become endemic, reducing costs and improving capex efficiency are important ways to improve performance – New developing market entrants in capital-intensive industries have built a strong competitive advantage by keeping capex relatively low. By contrast, the focus on cutting costs at many established players means they sometimes lose sight of improving capex. One way to get the balance right: Develop a more disciplined approach to managing capex, and benchmark the company’s performance against the industry’s leaders.

• Cost discipline makes a critical difference. One-time efforts usually fail to deliver savings that stick, as our research shows. One explanation is that in tough times, management teams are quick to cut costs, but when the cycle swings up, they tend to take their eye off cost improvement and focus on growth-related priorities.

• Developing a rigorous approach to cost improvement and nurturing the right capabilities to optimize working capital can help capital-intensive companies outperform.

2. Build the lowest-cost position

• Geography is another key factor for improving returns. Investing in geographies that offer the lowest landed cost position can create a strong competitive advantage. It’s particularly important in asset-heavy industries where the one-time cost of closing and moving businesses is high.

• The best-performing firms revisit their geographic footprint regularly, as cost dynamics are constantly evolving.

• Companies that can choose the lowest-cost geography up front gain a competitive edge. Those in mature industries need to weigh the short-term downside against the longer-term benefits of reducing complexity.

3. Use mergers and acquisitions strategically

• Smart acquisitions can help improve performance significantly, but many companies get off to a bad start by investing at the top of the cycle, when prices are at their peak, simply because that’s when cash is available. Leadership teams that take a strategic, disciplined and long-term approach to M&A instead of a tactical and episodic approach can improve returns significantly.

• Companies that nurture M&A as a core competence derive the greatest value from them. Their leadership teams devote time to developing a structured roadmap of the most attractive potential targets, making it easier to acquire assets when the right opportunity comes along-and to target acquisitions at the bottom of the cycle.

• Companies that are most experienced in M&A build their capabilities over time. They search hard for merger or acquisition candidates that will add to their operating profit and fuel balanced growth. They pursue nearly as many scope deals as scale deals, moving into adjacent markets as well as expanding their share of existing markets. Most importantly, they create Repeatable Models for identifying, evaluating and then closing good deals. What they typically find is that there are plenty of good prospects to be pursued and that the risk involved decreases with experience.

4. Service ace

• For traditional capital-intensive industries, service can be a highly profitable business in its own right, generating better and faster return on investment than new production facilities, large-scale R&D programs or acquisitions.

• Indeed, for many industrial manufacturers, investing in service is the only way to sustainably grow profits in a tough economic environment. Investing in a service business also lowers capital intensity.

• Investing in a world-class service business can become a strategic ace, elevating a company above competitors in an environment where differentiation on products and cost is difficult to achieve. The range of service opportunities, some larger than others, will vary by industry and company. Here again, mapping profit pools can help identify the potential size of service businesses and those with the greatest returns.

o There is no question that companies in capital-intensive industries operate in a difficult environment today. But leadership teams that commit to a bold ambition have opportunities to break away from the pack and achieve double-digit returns significantly above the cost of capital.

Best Practices applicable for Company’s Financial Health-Getting there requires a strategic shift toward a more profit-focused portfolio:

• Find the most attractive profit pools in your businesses.

• Adopt a mindset of continual cost improvement and capex optimization.

• Look for opportunities to drive down the company’s landed cost footprint by investing in the right geographies.

• Develop strong in-house M&A expertise and a structured roadmap of potential deals.

• Invest in related service businesses

Leadership teams that take these steps will not only give returns a powerful boost, they also will help to rebuild competitive advantage and position their companies to win in a changed industrial landscape.

Reengineering Strategies to improve the link Between Risk Management and Business Planning Process

• Business process reengineering is one approach for redesigning the way work is done to better support the organization’s mission and reduce costs.

• Reengineering starts with a high-level assessment of the organization’s mission, strategic goals, and customer needs.

• Within the framework of this basic assessment of mission and goals, reengineering focuses on the organization’s business processes–the steps and procedures that govern how resources are used to create products and services that meet the needs of particular customers or markets.

• Reengineering identifies, analyses, and redesigns an organization’s core business processes with the aim of achieving dramatic improvements in critical performance measures, such as cost, quality, service, and speed.

• Reengineering recognizes that an organization’s business processes are usually fragmented into sub processes and tasks that are carried out by several specialized functional areas within the organization.

• The CFO Act focuses on the need to significantly improve the government’s financial management and reporting practices. Having appropriate financial systems with accurate data is critical to measuring performance and reducing the costs of operations

Management & Decision Support Structure

• Investigate suggestion for reducing costs and to make them practical and acceptable

• Obtain definite prices and costs

• Present recommendation in comprehensive report

People & Organization

• Organize around outcomes and not tasks

• Have those who use the output of the process perform the process

• Built control in process systems

• Treat geographically dispersed resources

Policies & Regulations

• Develop policies and procedures

• Comply with compliances

• Environmental compatibility

Information & Technology

• Information should go along with the process

• Link all activities

• Capture information at source

• Create reports and real time online updates

Frame for Assessing Reengineering

• Assessing the Organisation’s Decision to Pursue Reengineering

• Reassessing of Its Mission and Strategic Goals

• Identifying Performance Problems and Set Improvement Goals

• Engagement in Reengineering

• Assessing the New Process’ Development

• Appropriately Managing of Reengineering Project

• Analysis of the Target Process and Developed with Feasible Alternatives

• Completion of Sound Business Case for Implementing the New Process

• Assessing Project Implementation and Results

• Following a Comprehensive Implementation Plan

• Executives Addressing Change Management Issues

• New Process Achieving the Desired Results

FOCUSING ON RISK PREFERENCE AND CHOICES FOR CFOs CONSIDERATION TO DELIVER ECONOMIC PROFIT DURING TOUGH CONDITIONS

CFOs need to develop a stronger focus on the economic and performance drivers of their business and need to understand how the effective allocation of scarce resource will help them achieve financial objectives. The CFO must build a performance management capability that can:

• Provide visibility and analysis of information to support resource allocation

• Support the decision-making process by providing the right information to the right people at the right time

• Demonstrate the financial impacts of different decisions and scenarios to enable the organization to predict and compare outcomes

• Incentivize executives and managers to make decisions that maximize marginal contribution

• Enable a data-driven view on resource allocations across the entire value chain (to include corporate strategy; sales, marketing and customer service; supply chain manufacturing and production; finance, HR, legal and compliance)

• Identify the most critical decision points that drive economic performance

With a unique perspective across the entire business, CFOs can provide valuable insight into the decisions that create or protect marginal contribution across the value chain. Armed with a detailed understanding of how and where growth in sales leads to growth in profits, they can offer an objective assessment of fixed and variable costs, and then identify how a reduction in costs can maintain revenues while improving profit contribution.

• Establish a clear, forward-looking line of sight on relevant data for critical decision points

Finance must have access to a robust data set, built around the decisions that drive most economic value in the organization, including assessment of opportunity cost. This demands accurate, verifiable underlying data and an understanding of how the data relates to value chain decisions. This will enable the CFO to conduct scenario planning around these different decision points.

• Develop aligned performance management processes that drive rational decisions

Finance must be able to translate insights and understanding into the desired end product – rational decisions that maximize the desired economic return. Aligning traditional resource allocation processes with business objectives helps ensure repeatability and the sustainability of the organization.

• Ensure compliance and make sure that finance’s voice is heard

The CFO and finance function must be positioned appropriately within the organization to be able to influence decision-making and action. Additionally, finance professionals must improve communication and influencing skills to ensure that their voice is heard and their advice is valued and acted upon.

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The Importance of Credit Risk Management for Banking

The importance of credit risk management for banking is tremendous. Banks and other financial institutions are often faced with risks that are mostly of financial nature. These institutions must balance risks as well as returns. For a bank to have a large consumer base, it must offer loan products that are reasonable enough. However, if the interest rates in loan products are too low, the bank will suffer from losses. In terms of equity, a bank must have substantial amount of capital on its reserve, but not too much that it misses the investment revenue, and not too little that it leads itself to financial instability and to the risk of regulatory non-compliance.

Credit risk management, in finance terms, refers to the process of risk assessment that comes in an investment. Risk often comes in investing and in the allocation of capital. The risks must be assessed so as to derive a sound investment decision. Likewise, the assessment of risk is also crucial in coming up with the position to balance risks and returns.

Banks are constantly faced with risks. There are certain risks in the process of granting loans to certain clients. There can be more risks involved if the loan is extended to unworthy debtors. Certain risks may also come when banks offer securities and other forms of investments.

The risk of losses that result in the default of payment of the debtors is a kind of risk that must be expected. Because of the exposure of banks to many risks, it is only reasonable for a bank to keep substantial amount of capital to protect its solvency and to maintain its economic stability. The second Basel Accords provides statements of its rules regarding the regulation of the bank’s capital allocation in connection with the level of risks the bank is exposed to. The greater the bank is exposed to risks, the greater the amount of capital must be when it comes to its reserves, so as to maintain its solvency and stability. To determine the risks that come with lending and investment practices, banks must assess the risks. Credit risk management must play its role then to help banks be in compliance with Basel II Accord and other regulatory bodies.

To manage and assess the risks faced by banks, it is important to make certain estimates, conduct monitoring, and perform reviews of the performance of the bank. However, because banks are into lending and investing practices, it is relevant to make reviews on loans and to scrutinize and analyse portfolios. Loan reviews and portfolio analysis are crucial then in determining the credit and investment risks.

The complexity and emergence of various securities and derivatives is a factor banks must be active in managing the risks. The credit risk management system used by many banks today has complexity; however, it can help in the assessment of risks by analysing the credits and determining the probability of defaults and risks of losses.

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Risk Management in Binary Options Trading

Risk management in trading is indispensable, if you want to succeed in the binary options market. If you do not have a proper risk management plan you may not be able to achieve success in this volatile market.

As a trader you need to understand that it is not easy to make consistent profits in this market. There are inherent risks associated with this market and if you are not careful you may lose big money and all your investments within a few trades.

Managing risks in binary options trading

Irrespective of whether you are a beginner or experienced trader, you need to have a proper plan for every trade.

A well made plan can enable you to take your first step into successful trading. After you have made a good trading plan it is important that you stick with it.
If you keep making changes to the plan at regular intervals, you may not be able to benefit from it.
Placing emotional and impulsive trades can also result in big losses. When you let emotions cloud your mind you may not be able to think in a rational manner and this can affect your investment decisions.
Planning can help you trade in a disciplined manner and you may be able to avoid emotional and impulsive trades.
A good plan should include how much you can afford to lose in each trade. This can enable you to set stop loss orders in advance so that you are able to avoid big losses even if the market moves in the opposite direction of the trade you had placed.
Placing a stop loss order is one of the best risk management strategies that traders can use to minimize losses.

Most traders do not have a clear idea about risk tolerance levels and trading targets. They also do not know when to enter and exit the market. All these factors can substantially increase the risks of trading. If you want to protect yourself from losses it is important that you determine your risk tolerance level before you place a trade.

Leverage is a wonderful tool that can be used by traders to make big profits from small trading accounts. Using proper leverage is important if you want to manage the risks of trading in an effective manner. If you are a beginner it is best to avoid using leverage until you gain adequate knowledge and experience.

Traders want to make big profits within a short period and this often leads to risky trading. This includes placing big trades instead of small trades and this can increase the risk of accumulating big losses. It is best to have a good strategy for risk management in trading, so that you are able to minimize losses and maximize profits.

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Quality Risk Management In Pharmaceuticals

Risk management principles are widely and effectively used in a lot of areas of government and business that include finance, occupational safety, insurance and public health among many other areas. As much as there are few examples that use quality risk management in the pharmaceutical industry, they are restricted and thus do not really signify the complete contributions that risk management has to and can offer. Besides that, quality risk management has proven critical in the pharmaceutical industry and thus it is a valuable ingredient towards the production of quality goods and services.

Different Approaches:

Proactive – this approach is aimed at identifying the threat or risk that could cause potential loss before hand. This means that it is a preventive approach.

Reactive – contrary to the above, this approach aims at dealing with the effects of the loss i.e. after the loss has occurred.

Risk Assessment:

Risk assessment generally consists of identification of the potential hazards, the analysis, and evaluation of the risks that might be associated with these hazards. Risk assessment starts with the identification of the risk itself.

Risk identification – this is the systematic use of available information about the product and the process involved to identify the hazards associated. The question to be asked while identifying a particular risk is “what could possibly go amiss?” as well as identify what would be the consequences if things went wrong.

Risk analysis – deals with the estimation of the risk associated with the threat. It can either be quantitative or qualitative.

Qualitative – this type of risk analysis deals with inexact concerns that are experiential rather numerical.

Quantitative – when a particular risk is put across in this fashion then numbers play out the extent to which a particular risk can cause potential loss can be measured using a Risk point number (RPN) rating scale that include three levels:

1. Low – this is the lowest level and it indicates that particular risk has very low probability of occurrence and has no impact on the quality of the product.

2. Medium – this type of risk may occur and may also have an indirect impact on the product quality.

3. High – this risk has a high probability of occurrence and it also has a direct impact on the quality of the product.

Risk control:

Risk control basically deals with decision making that will either reduce or accept the risks involved. As the name suggests, what we hope to achieve in risk control is reduce the probability of the risk occurring or reducing the impact of the risk.

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