Managing business risk in China and creating a strong business risk management program is increasingly important in ensuring the success of an entity. Performing an annual business risk analysis is one effective tool used by companies in their risk management program to manage their business risk.
During the performance of a business risk analysis, it’s important for management to use various sources to compile the more significant risks faced by the Company. The management involved in this process would typically consist of the Company’s leaders, and can include internal and external legal counsel, the finance department, operational management and others. A business analysis risk assessment – assessing, combining and grouping the risks as identified in this process, as well as determining the Company’s responses to those risks, is usually based upon management’s perception of which risks are more significant to the Company in the current environment.
A management team should conduct this business risk analysis with input from the Chief Executive Officer, Chief Financial and Operating Officers, the Chief Legal Officer, Senior Operating management as well as finance, information technology, system and internal control specialists. Careful consideration should be given to risk management ownership and accountability, with different kinds of risks (technology, security, continuity, regulatory, financial etc.), defined. Risk tolerance profiles, root cause analyses and risk brainstorming sessions, quantitative and/or qualitative risk measurements are all useful in the process.
A Company’s general overall risk management process should consist of a variety of activities, such as the following:
Frequent meetings with the CEO and different departments’ employees every quarter together with their VPs, to promote the Company’s culture and history are important in the risk management process. A Company’s Business Values should be an in-depth topic on an annual basis. Additionally, frequent meetings with the CEO and department heads are useful to discuss strategy and mitigate risks.
A disclosure committee, together with external and internal counsel can review quarterly and annually the Company’s disclosed risks in any filed reports discussing can also help ensure that the Company’s risk disclosures are up-to-date and complete.
Market Overview (External)
In general, Market Overview is as set of the risks in the competitive, regulatory and macro-economic environments. The competitive environment consists of the opportunities and threats that encompass a company’s industry and other factors, such as the appeal of the company’s products and services in current markets and likely changes in the future. The regulatory environment, such as the nature of, and changes to laws and regulations, income tax and customs rates and regulations, can have an enormous impact on business activity, as well as the degree of supervision and control exercised by external regulators. Also to be considered is the macro-economic environment and the macro-economic factors that impact performance such availability and cost of capital, shifts in demographics, trends, and the like.
Strategy (Internal)
Internal Strategy includes management’s key goals and objectives, targets, and milestones, and the actions required to meet strategic aims, as well as strategic and organizational alignment and the communication of that organizational alignment internally and externally. Internal Strategy includes the consideration of resource plans and needs, expansion plans and reliance on certain services lines. Important in this area is how the Company’s corporate governance influences the Company through supervision, oversight, and the accountability of the board of directors and management.
Value Creating Activities
Value Creating Activities are activities which facilitate the increase of customers buying the Company’s goods or services or influence positively customers’ future buying behavior. Additionally important are activities which help with key employee retention and enhancement of the innovation process, including full utilization of technology resources, creating new business models and making value from the intangible assets of the business. Other value creating activities involve the enhancement and strengthening of a Company’s brand, its supply chain and the infrastructure that supports it.
Financial Performance
Financial Performance consists of the risks related to results of operations and financial condition, such as assets on the balance sheet, trends in working capital and the ability to fund both short and long-term growth opportunities. Economic and segment performance needs to be understood, as well as the Company’s risk profile and its risk in order to establish the appropriate cost of capital and required returns. Furthermore, Financial Performance should include assessing risks over management’s attitude toward the selection of its accounting policies.
Management’s Response or Risk Strategy as a Result of the Business Risk Management Analysis
Generally, management’s approach to each risk identified is to adopt one of four strategies; transfer the risk, manage it, avoid the risk or accept it. The Company should identify those risks; assess the likelihood of occurrence and possible outcomes and determine management’s specific responses to those risks. It’s vital for the Company to document its analysis, categorization of risks and responses selected, as well as monitoring the activities and results of the risk assessment program. This ensures the Business Risk Analysis and risk assessment program is measured for effectiveness and altered as necessary. The formalization of a risk assessment program, with the use of an annual Business Risk Analysis process is important and can help a Company.
This article is provided by LehmanBrown.
The views expressed in this article do not necessarily reflect the views of the EU SME Centre.
