What is a Risk Management Strategy? CFO Guide

Amongst the list of responsibilities on a CFO’s plate, risk management takes up a big portion. Having a risk management strategy enables an organisation to understand what risks are likely to occur. It also outlines the actions that each person is responsible to take should said risk come to life. 

As a CFO or business leader, it’s up to you to leverage digital innovations to help assess, manage, and mitigate the risks your organisation is up against. While there’s no organisation void of risk, there are several different approaches to managing the different types of risk. With the aid of technology and automation tools, you can be well-equipped to reduce risks with more confidence and less stress. 

Coming Up

1. What is a Risk Management Strategy?

2. Example: Implementing Risk Management Strategy in a Large Organisation

3. Conducting Risk Assessment

4. Managing Risk

5. What is Risk Management in Finance?

6. Best Strategies for Treating the Risk

7. Monitor the Risk

8. No Risk, No Reward

What is a Risk Management Strategy?

A risk management strategy involves performing risk assessment, risk response and risk monitoring. It encompasses an organisation-wide approach to dealing with risk, including the assumptions made, risk constraints, priorities, tolerance and acceptance criteria. 

Risk management strategy defines a process that can be implemented on a regular basis to have an up-to-date outlook on developing risks or changes in threat levels. The process begins with risk assessment, or reviewing and identifying the risks your organisation faces. It continues with assessing the likelihood and potential outcomes associated with each risk. Then, teams can work together to prioritize the risks worth managing. Each risk can be managed with its own approach. If the risk occurs, you can monitor the effects and document them for future reference. 

The implementation of data automation tools, especially within finance teams, offers one easy solution to help mitigate several types of risk, including compliance risk. Such tools can reduce manual errors, provide audit trails, reduce operational risk and allow teams to focus their time on high-level tasks. 

Example: Implementing Risk Management Strategy in a Large Organisation

Within a large organisation is typically structured in a hierarchy, where each individual is responsible for their own set of duties. To implement a risk management strategy, it’s best that it comes from the top. It can work like this: 

• An Finance Director provides training to each manager to carry out risk assessments 
• The assessments are standardised through the use of templates (can be accessed through an automation solution) 
• The Finance Director brings the assessments to a Senior Manager to discuss the approach and overall risk 
• Together, the organisation creates a profile that prioritises risks and the Senior Manager approves the action to be taken 
• The process runs and after a few months, a report is delivered to the Management Committee to review progress 
• Each year, the team reassesses risk and the risk management strategy 
  

If you implement an automation tool, you can set up this approval process within a system so it moves along each step without stoppages. 

Conducting Risk Assessment

Risk assessment is a process that is iterative. It should be systematic, regularly reviewed and recorded. 

Managing Risk

By categorising risk, you can construct a risk management strategy to approach it. Most types of risk fall into these three categories:

• Preventable Risks: Preventable risks stem from within the organisation and should be avoided or eliminated. For example, this could be an employee conducting illegal business or performing actions that break down the operational processes. Since there is no benefit from such risks, they should be eliminated. 
  

• Strategy Risks: To reap benefits of business, strategic risk is inevitable. These risks come along with operating. They can be managed within a rule-based control model that aims to reduce the probability that the risk will occur. 
  

• External Risks: Risks that are external are uncontrollable. These could be natural, political or economic risks. To control them, they must first be identified and a plan can be made to mitigate their negative consequences. 
  

What is Risk Management in Finance?

With any business, risk management is necessary. When applied to finance, it involves techniques used to measure, monitor and control financial and operational risk. Risk management helps to forecast return on investment (ROI) and make strategic financial decisions. 

With an automation tool, you can leverage historical data and use predictive and prescriptive analytics to help with decision-making. There are steps you can follow to create a risk management strategy in finance: 

1. Decide What Matters Most: As one of the most important steps in designing a risk management strategy, you’ll want to consider what is most important to the business. Since risk is related to rewards, you can outline your business goals. Then, you can assess what types of internal and external aspects you’ll need to take into consideration such as: political issues, government policies, lawas, business policies, business strategies, technology trends and the economic environment. 

2. Consult with Stakeholders: There are several stakeholders within a business that care about how you manage risk. It’s best to bring them into your risk management strategy for feedback and concerns. Stakeholders may include: employees, contractors, clients, suppliers, investors, insurers, government agencies and the local community, to name a few. 

3. Identify the risk: The risk management strategy truly begins when you identify the type of risk your organisation faces. You can perform research on past events, community issues, the current and potential future business environment, market research and the like. To identify issues internally, you can look to hazard logs, incident reports and audit reports. A software automation tool comes in handy at this step because it can store a lot of historical data in a centralised location. Additionally, by running reports and reviewing alerts, you can pre-empt operational risks before they occur. 

4. Analyse the risk: Once you identify the risks, you have to figure out which are the most important to focus on managing. To analyse risk, you need to consider the likelihood of the event happening, as well as the damage it would incur. You could use a risk assessment matrix, or rating system, to calculate risk levels. 

5. Evaluate the risk: After you’ve analysed and rated risks, you can look at their potential impact. Compare the level of risk against your risk criteria to help determine how you will approach the risk. In some cases, the best approach may be acceptance of said risk. 

6. Treat the risk: Depending on which risks need to be treated, you can set up a plan accordingly. A risk treatment plan includes: the type of risk, the likelihood of occurrence, strategies to treat the risk, a timeframe, responsible party, the resources required and future action. 

7. Commit to Reducing Risk: Risk is never over. With the variety of risks in the world, it’s important to devise a plan that’s committed to reducing risk all the time. CFOs and business leaders can create a company culture that’s adept at dealing with risk by: providing necessary resources, using feedback, updating plans, measuring the plans’ success through metrics, communicating risk plans to the organisation, and training new employees on how to manage risk. 

Best Strategies for Treating the Risk

There are four main approaches to treat risk. Depending on the risk at hand, a specific strategy will be more well-suited than another. Here are ways to approach risk:

• Avoidance: When it comes to strategic risk, the internal nature means that it is within your control. In this way, you may be able to make different decisions so your business can avoid the risk entirely. Avoidance means that you change the plan or avoid the activity altogether that carries the risk. This is only advisable if the risk outweighs the return. 
  

• Reduction: Risk reduction happens when you make small changes to reduce the impact of the risk on the business. It involves the allocation of resources and will likely cost money. But, it’s worth it when the risk reduction results in a better outcome than the downsides if the high-risk event takes place. 
  

• Sharing: Risk sharing or transference is when you redistribute the risk’s burden to another party, or multiple. Typically, this takes shape as an insurance policy, but it can also be shared with an outsourced entity or other company members. 
  

• Acceptance: Risk acceptance, or retention, means that you take on the risk and deal with the results. If the losses can be easily absorbed and are less costly than mitigating the risk, acceptance makes sense. 

Monitor the Risk

When you’ve devised a risk management strategy, the work is not done. You must ensure that it’s working in your benefit by monitoring risk and your approaches. One of the best ways to do this is to have a detailed plan laid out, filled with target completion dates, KPIs (measurements of performance) and responsible parties. 

This could create a lot of oversight, but with the use of a process automation tool, the system can handle the heavy lifting for you. Not only will automation help to reduce risk, but it can also help to monitor performance and prevent risks from occurring. Whether you use automation tools to reduce compliance risk through audit trails or to reduce operational risk by automating processes, you can benefit your business greatly with the technology.

No Risk, No Reward 

Risk is a natural part of business. Having a risk management strategy can help you to protect your organisation from the detrimental effects of risks occurring. While some risks are unavoidable, others can be mitigated with the aid of technology like automation solutions. 

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