Risk management is the practice of defining the risk level a company desires, identifying the risk level it currently has, and using derivatives and other financial instruments to adjust the actual risk level to the desired risk level. Financial risk management is the collection of various calculated measures taken to mitigate financial losses that would wreck the activities of a business if not properly checked.
As far as risk is concerned, a company does either of the four: mitigate the risk, transfer the risk, assume the risk and do nothing. The purpose of this article is to give you tips on how to go about mitigating risk using IT infrastructures. Before I go on discussing the mitigating procedures using IT, let me quickly give brief explanation of other two options opened to risk managers. The first is to transfer the risk. Basically, this has to do with engaging the services of insurance companies.
The other option is to do nothing. Managers should go by this option if they are satisfied with the level of risk, this they often do through risk analysis.
MANAGING RISK WITH IT INFRASTRUCTURE
Effective risk management begins with a clear understanding of the organization’s appetite for risk. This drives all risk management efforts. Here, I will assume that the company is risk averse. Since the primary tool for managing financial risk is derivative, the first thing to do is set up your IT infrastructure right. There are so many financial modeling softwares in the market today. This ranges from simple spreadsheet to more advanced ERP (enterprise resource planning).
By their rights, these softwares cannot offer anything as far as financial risk is concerned. What happen in most cases is that these financial modeling softwares are configured to act like a robot. For it to be done right, a team comprising of financial risk management, experts and IT professional needs to pool resources together. I have seen a case where an IT professional was contracted to single handedly implement financial risk management software. This is no doubt the wrong approach to the right decision.
Below are some aspects of business and finance reduces financial risk to a bearable minimum.
- Fraud fighting: forensic softwares can be used to effectively detect financial and other economic crimes before they cause serious financial loss to the company. Access control softwares are used to restrict access to highly sensitive information that would increase financial risk of a business.
- Physical security: biometrics and other physical controls are employed to restrict access to areas marked out of bound to non authorized persons.
- Enterprise systems: ERP softwares help businesses reduce the financial risks and business risks that a company may assume if business processes are processed manually. Though ERP implementations have its difficulties, but, when properly planned and managed, would give benefits that would greatly outweigh the challenges.
- Financial statements analysis and interpretation/financial management: IT has made it possible for businesses to be in control of their finances. In fact, finances and IT has so merged that one cannot do without the other. You reduce the risk of error in financial statements preparation for instance through the use of IT infrastructure. Again, forecasting that requires complex regression analysis is easily done with softwares with little or no room for errors that may eventually lead to financial risk and loss.
- Investment appraisal and management: some investment appraisal requires that iterative steps be taken in order to make the right ‘what if’ decision. These decisions when made wrongly will definitely affect the bottom line of the business. IT can help eliminate the risk of miscalculations and other errors that can easily be avoided.
- Human resource management: it is relatively easy to manage personnel of a business with IT than it would be when managed manually. Error of over and under payment of staff members would be avoided in an environment where IT is used to manage human resource department.
- Compliance services: IT will make it easy for businesses to track compliance with relevant laws and regulations that a company is required to follow. Softwares are configured to raise alarm whenever procedures that could amount to violation of rules and regulations are violated.
- Privacy service: deployment of relevant IT infrastructures will help companies save legal expenses that might be spent on cases. People of this generation no longer take light the issue of privacy violation. The right kind of softwares can help reduce the incidence of privacy violation to the barest minimum.
- Knowledge management: a company that does not mange her knowledge base well stands the chance of being exposed to high level of business risk and financial risks associated with lack of continuity in business. Intelligent softwares now abound that can mimic processes or activities performed by human beings. These softwares would fill the gap for the employee in the case where he or she leaves the company. All that needs to be done is to allow the software learn from the responsible individuals. Yes, softwares learn certain routine processes just like human beings do.
A lot of people have this misconception that financial risk is only associated with capital market and other aspects of business finance. Their view of financial risk is narrowed down to the effects of financial assets on the activities of both individuals and corporate bodies.
This is a wrong assumption as the prevailing financial and business landscape have made it even more complex and riskier for entities and their finance.
Financial risk management with IT is a skill that every finance professional should constantly strive to acquire. Finance and IT are ever changing fields and requires a high level of dynamism in handling.
To your successful financial risk management through IT!