Last updated on Feb 20, 2024
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Risk identification
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Risk prioritization
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Risk mitigation
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Risk monitoring
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Risk culture
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Here’s what else to consider
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Corporate finance involves making decisions about how to allocate capital, invest in projects, and manage risks. However, these decisions are often subject to uncertainty, volatility, and complexity. Therefore, it is essential to identify and prioritize the risks that could affect the financial performance and value of a company. In this article, you will learn some of the best practices and tools for risk identification and prioritization in corporate finance.
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- Jesús Aguirre Gonzales Financial Analyst | Accounting | Project management | Business Intelligence 📊 | Data Analyst in progress 👨💻
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- Dr. Iván Araya Canelo Docente pregrado y MBA | Investigador en Estructura de Capital y Riesgo Moral | Consultor en Planificación y Gestión…
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1 Risk identification
Risk identification is the process of finding and documenting the potential sources of loss or harm that could affect a company's financial objectives. This involves scanning the internal and external environment, considering the stakeholders' expectations, as well as analyzing historical data and trends. Common methods for risk identification include brainstorming, interviews, checklists, SWOT analysis, and PESTEL analysis. Brainstorming involves having a group of experts or managers generate ideas and insights about the possible risks. Interviews involve eliciting opinions and experiences from key personnel or stakeholders about the risks they face or anticipate. Checklists provide a list of predefined risk categories or factors to prompt the identification of specific risks. SWOT analysis is a strategic tool that assesses strengths, weaknesses, opportunities, and threats of a company or project. Lastly, PESTEL analysis is a macro-environmental tool that examines political, economic, social, technological, environmental, and legal factors that could affect a company or project.
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- Jesús Aguirre Gonzales Financial Analyst | Accounting | Project management | Business Intelligence 📊 | Data Analyst in progress 👨💻
La mejor manera de identificar y priorizar riesgos en Finanzas Corporativas es mediante un enfoque integral que incluya la evaluación de riesgos financieros, operativos y estratégicos. Esto implica el análisis detallado de factores como la volatilidad del mercado, la gestión de liquidez, la exposición cambiaria y los riesgos regulatorios. Luego, se debe asignar una ponderación a cada riesgo según su impacto potencial en los objetivos financieros de la empresa.
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- Dr. Iván Araya Canelo Docente pregrado y MBA | Investigador en Estructura de Capital y Riesgo Moral | Consultor en Planificación y Gestión Financiera | Experiencia Gerencial
Mi experiencia dice que, en general, son al menos dos los tipos de riesgo que enfrentan las finanzas corporativas:1. La administración del efectivo conlleva riesgos de liquidez, ya sea, por una mala estructura de financiamiento y/o, malas prácticas en la administración del flujo de caja.2. La adquisición de activos de largo plazo tienes efectos en la creación de valor, y estos se ven afectados por riesgos de volatilidad de las monedas, los tipos, o bien, las materias primas. Para ello es necesario utilizar estrategias de coberturas, ya sea, mediante algún derivado ad hoc al subyacente.
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2 Risk prioritization
Risk prioritization is the process of ranking the identified risks according to their likelihood and impact, which helps to focus attention and resources on the most significant and urgent risks. Additionally, it assists in establishing the risk appetite and tolerance of a company or a project. Common methods for risk prioritization include Risk Matrix, Risk Score, and Risk Map. Risk Matrix is a graphical tool that plots risks on a grid based on their probability and severity, then classifying them into different zones or levels of priority such as low, medium, high, or critical. Risk Score is a numerical tool that assigns a value to each risk based on its probability and impact. The value is calculated by multiplying the probability and impact ratings or using a weighted formula, then ranking the risks by their scores from highest to lowest. Lastly, Risk Map is a visual tool that shows the relationship between the risks and objectives or dimensions of a company or project. The map can also demonstrate interdependencies and correlations among the risks.
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3 Risk mitigation
Risk mitigation is the process of reducing or eliminating the negative effects of the prioritized risks, which involves developing and implementing strategies and actions to address the root causes or consequences. Common strategies for risk mitigation include avoidance, which is eliminating the risk by changing the plan, scope, or design; reduction, which is minimizing the probability or impact of the risk; transfer, which is shifting the responsibility or burden of the risk to a third party; and retention, which is accepting the risk and its consequences either by choice or by default.
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4 Risk monitoring
Risk monitoring is the process of tracking and evaluating the progress and performance of risk mitigation strategies and actions. This includes measuring and reporting the changes in risk exposure, the effectiveness of risk responses, and the occurrence of risk events. Risk monitoring can be done through a risk register, a risk dashboard, or a risk report. A risk register is a document that records and updates information about identified, prioritized, and mitigated risks. A risk dashboard is a graphical tool that displays key indicators and trends of the risk management process. Lastly, a risk report is a communication tool that informs stakeholders about the objectives, scope, methodology, results, and recommendations of the risk analysis and mitigation.
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5 Risk culture
Risk culture is an essential element of risk management, influencing how risks are identified, prioritized, mitigated, and monitored. It also affects how the risks are communicated, shared, and learned from. To shape and improve the risk culture, leadership must set the vision and direction for risk management, demonstrating and promoting values that support a positive and proactive risk culture. Governance should ensure that risk management activities are aligned with company or project strategy, objectives, and standards. Education is key to providing people with knowledge and skills to understand, assess, and manage the risks; they should be given training, tools, and resources to enhance their risk awareness and competence. Finally, incentives should reward and recognize desired risk management behavior based on performance, outcomes, and feedback of the risk management process.
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6 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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