Accounting News

Tuesday, May 29, 2012
Managing Risks

One undervalued abilities of the top accountants is the ability to identify and plan for risk. This can be done when quarterly or yearly audits are performed on the business. The object is to identify any areas for risk and help management create a plan to mitigate the risks in their control or have contingencies set up when they can't.

There are several different categories of risk:

Operational Risk

There are associated with the daily operations the business. This can be risks to losing key employees, equipment failure, or process problems that can affect the operation of the business. All of these risks are internal to the company. A sub category of this are IT risks. How secure is the companies network and computer resources. Some companies could be shut down by a hacker just looking around for a server to exploit.

Strategic Risk

These are risks that are external to the company but part of the environment it operates in. This includes the economic conditions like a recession or boom. It is can also be risks associated with technological or social changes to the market.Almost every business has some risk associated with weather. It can be large like a hurricane or milder like a reduced demand from changing weather patterns.

Credit Risk

The market may change that lead to higher borrowing rates. This is most common among financial companies but any business that is highly leveraged has exposure to changing credit markets.

Compliance Risk

These are risks associated with regulatory agencies and governments. Changing laws, including taxes, can have a dramatic impact on the bottom line of a business. There are also tremendous risks in audits from regulators. An SEC audit and cost millions to defend without any charges being filed.

Any one of these risks can have a severe impact on the company. Most managers never account for lost days when a snowstorm can shut down an office. Or perhaps a key employee may leave to pursue their dream of becoming a fly fishing guide. At the bare minimum every company should have reserves to cover expenses should external forces change. All key employees need to have frequent conversations with management to make sure there are no hidden changes coming.

Every year take some time to meet with internal and external accountants to identify risks. Weather, economic conditions, and political changes are important to investigate. Don't just consider what might happen in the next twelve months but what changes are possible over the next ten years. Then make contingency plans to capitalize on the changes.