Risk Primer
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Risks can be categorised in these four groups:
Market Risk - What can exposure to adverse markets do to your stability? For example, exposure to price movement, fluctuation in interest rates, commodities.
Credit Risk - What happens if a creditor fails to honour their agreements? For example, you deliver goods to an insolvent organisation.
Operational Risk - What happens if you do not know what is going on in your business? For example, you reward people in such a way that they are led to pursue personal objectives that undermine the business and you have no way of knowing what they are up to.
Business Volume Risk - What happens if the demand for your product drops? For example, you are forced to recall a product line and consumers lose faith in the rest of your product line.
See our ICSB2006 risk paper and our links page for more on risk including forms.
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To responsibly deal with these risks you need to have systems in place from board level down throughout the organisation. This involves establishing processes based on your analysis of how these four types of risk impacts your industry in general and business in particular. With such an understanding you will be able to assemble an arrangement or processes to control the risks as they can be expected to occur.
To ensure that these processes are effective you need to review them at least once per year and - more importantly - following significant changes to your business. i.e. ask:
Do strategy makers understand risks they are confronting?
Do strategy makers have structures and charters to guide them to be thorough and rigorously pursue risk and create management capability to control risk?
Do strategy makers have a uniform understanding of risk policies?
Do strategy makers add value to the management of risk?
Having completed each review, you should apply some sort of team based process improvement framework to resolve shortfalls and tighten up processes.
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