Question

Organizations spend significant time and energy producing sales and cash-flow forecasts, yet they sometimes fail to formulate priorities and objectives for risk management. This makes it difficult for financial managers who must make decisions without a clear strategic mandate. Explain the issues that organizations may wish to consider when assessing their priorities and the requirements of a financial risk management program.

Answer 1

Assessment of future related to the performance of the business is not precise and there has not be an absolute measure to determine the cash flows related to business in future so it will always be deviating from the the expected and forecasted so there is a need for development of financial risk management in order to deal with fluctuations in cash flows and risk management.

A.organisational should be trying to stay conservative in nature and should be incorporating all the minute macro and micro events into its overall business structure.

B. Organisation should always be trying to discount on the fluctuations related to macro risks like inflation and changes in the interest rates.

C. Organisational structure should be made in such a way that there is always a proactive management of the risk rather than reactive management of the risk.

D. An organisation should be trying to always discount weighted average cost of capital which will be ascertaining the risk weighting into its overall cost of capital when applied for discounting of a project

E. An organisational structure should be designed in such a way that it should keep a rate of failure of expectation allocated to the overall capital projects and these failures ratios will be protecting the organisation against unfavourable events.

F. Emergency fundings should also be maintained by the company in order to deal with unfavourable Economic cycles.