Question

How does risk management increase the value of a firm?

Answer 1

Risk Management:

Risk in business is common but what is uncommon from where it comes in, and surprises you. So, it is generally accepted that when you are running any business

you can not avoid the risks coming in rather you can plan with experts to minimize the impacts.

Types:

1. Financial risk:

Related to liquidity, interest rates, exchange rates (in case of international business) and any misuse of financial resources. It is quite common that any risk that hit a business will make an impact to the finances of the company and can impact the cash flow for the business and end up with financial loss.

2. Compliance risk:

Related to stock exchange regulations, non-compliance with financial standards or law, and non-compliance with tax regulation, non-compliance with environmental regulations and non-compliance with the GDPR norms (trending recently). Companies were impacted and earned a huge loss for these risk. You an imagine your firm did not prepare for the new compliance that was introduced last quarter, oh! you lost $100 million, be prepared next time.

3. Business risk:

Related to the economic transformation, technological transformation and competition from new as well as similar business competitors. This also occurs when companies strategy becomes less effective and it is hard to achieve its goals. These risk can be disastrous if not handled with appropriate superiority, firm can run out of business.

4. Operational risk:

Related to the loss of assets, poor service levels, employee dissatisfaction, shortage of raw materials for day to day operations and most importantly technical downturn. There could be some other problem adding to the risk e.g. natural disaster, economic downturn, political impacts, etc. These can not only add cost to fix the problems but also prevent / delayed customer delivery and services, resulting in loss of revenue and damage to your reputation.

There could be many more risk which could be certainly a part of the above four risks e.g. strategic risk, reputation risk, etc.

Experts can channelize the risk to minimize the impact, that is why some of these risk managers are highly paid in the market.

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