The mandate of the CFO has shifted in recent years. Not only responsible for financial matters, the modern CFO also has a part to play with regards to strategy and risk management. Different types of risks require specific strategies. In this blog, we will discuss these risks and how CFOs can handle them to ensure organisational success and stability.
Understanding the different categories of risk
Business risk refers to the potential for loss or failure that an organisation encounters, whether it be because of internal or external factors. There are a number of risks finance leaders might regularly encounter, however broadly speaking they can be classified under four distinct categories.
The four primary types of risks that demand CFOs' attention include:
Strategic risks:
Strategic risk encompasses failures in strategic planning, for example uncertainty surrounding leadership changes or risks associated with mergers and acquisitions.
Compliance and regulatory risks:
Compliance and regulatory risk arise from an organisation's failure to meet industry laws, regulations, internal policies, or prescribed best practices.
Financial risks:
Financial risk is often triggered by instabilities, losses in the financial market, or fluctuations in stock prices, currencies, interest rates, and more.
Operational risks:
Operational risk may stem from breakdowns in internal procedures, human error, inadequate systems or technology, or external events.
While some risks are ever present and static, socio-political and economic factors may bring about emerging risks. These risks are dynamic and can significantly impact organisations, requiring CFOs to reassess their risk management strategies. The changing risk landscape brings new challenges and considerations, such as increasing compliance requirements or unexpected events on the world stage. Examples of these emerging risks could be as follows:
ESG risks:
With the growing significance of sustainability and social responsibility in business, CFOs are faced with new ESG risks. These risks encompass environmental issues, such as climate change and resource scarcity, social issues like labour practices and customer privacy, and governance concerns like board effectiveness and executive compensation. CFOs need to integrate ESG considerations into their organisational strategies, financial decision-making, and risk management practices to address these emerging risks effectively.
Economic changes:
Events unfolding on the world stage, such as political or economic tensions between countries, can introduce unexpected risks. For example, sanctions imposed on certain countries like Russia can disrupt supply chains, financial markets, and trade relationships. These events can have serious implications for organizations operating in a global context. CFOs must closely monitor geopolitical situations worldwide and have contingency plans in place to mitigate the potential impact and ensure business continuity.
Ultimately CFOs must be proactive in identifying and analysing both static and emerging risks and develop strategies to address them effectively. Companies that fail to appropriately assess risk could face all manner of consequences, from reputational damage, monetary losses, and even legal penalties. Of course, risk management does not mean risk elimination. Risk is inherent to business, avoiding it entirely would be to avoid any opportunities for growth. The key to managing risk is a balanced view, as well as the utilisation of a risk management framework.
Leveraging the Risk Management Framework (RMF) and mitigation strategies
Risk management is a crucial aspect of financial management for CFOs, as it allows them to proactively identify, assess, and address potential risks that could impact their organisations. The Risk Management Framework (RMF), originally developed for federal government agencies by the National Institute for Standards and Technology (NIST) in the United States, has gained widespread recognition and has been adopted across the private sector as well. This framework provides a structured approach for organisations to manage risks effectively.
