March 28, 2018

Business Risk, Operational Risk and Related Financial Risk

Charles H. Smith, PhD

The Importance of Negative Risk Forces

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While researchers, analysts and various other writers tend to emphasize the importance of classifying and categorizing business risks in various ways, in the final analysis, an effective enterprise risk management system needs to focus attention on the negative risk forces at play in a company’s business environment. These forces are responsible for the damage to a company’s operations and various critical assets, and they need to be identified, prioritized and monitored toward the end of effective risk management. Such a focus on the actual (real) sources of damage also serves to overcome the confusion caused by researchers and analysts etc. who tend to classify and categorize business risks in ever so many different ways. It is these negative forces at play that are important, not the classification and categorization schemes.

Negative Operational and Related Financial Risk Forces Having the Potential to Impact a Company’s Ability to Accomplish its Goals

  • general uncertainty surrounding the economy,
  • supply chain issues (availability of important raw materials and goods, increase in prices of raw materials and goods, delays in delivery of raw materials and goods),
  • manufacturing operations issues (machine breakdowns),
  • industry crises,
  • cost overruns,
  • employee issues (ability to attract and retain talent, fraud),
  • marketing and sales issues (market volatility, customer behavior, increased competition),
  • technology systems and processes (IT security, breakdown of important information infrastructure and networks, impact of technology advances),
  • physical issues (fire, explosion, social engineering, crime),
  • possible economic stagnation (country risk)*
  • significant increases in the prices of raw materials and goods,*
  • availability of important raw materials and goods,*
  • dealing with smaller markets,*
  • availability of critical personnel,*
  • customer payment abilities,*
  • larger customer payment cycles,*
  • counterparties not being up to their contractual obligations, and*
  • commodity price changes (oil, gold, copper).*
The above is not a complete list. Note that it excludes cyber, political, compliance, economic, geo-political, geo societal and geo-environmental (physical) etc. risk forces which can have a significant impact on a company’s operations and financial condition.

Negative Impact of the Operational and Related Financial Risk Forces

One or more of the above forces in combination can lead to 

  • business interruption/disruption,
  • inability on the part of the company to accomplish its profit and growth goals, and thereby
  • a negative impact on cash flows, which, in turn, can lead to
  • inability on the part of the company to pay its short-term and long-term liabilities, and
  • inability on the part of the company to pay the interest on its long-term debt, and also principle payments on such debt.

One or more of the above results in combination can produce the inevitable result of 

  • an unfavorable debt:equity ratio, which, in turn, can lead to
  • a decline in the company’s debt ratings by external organizations, and thereby
  • an increase in the rate of interest on long-term debt (cost of capital),
  • negative perceptions on the part of suppliers, customers and the community,
  • negative impact on intangible assets such as brand and reputation, which, in turn, can lead to
  • a decline in the value of the company, and an inability on the part of the company to deliver value to its stakeholders.

Importance of the Above for the MeasuredRisk Platform

It is because of the potential for such devastating results as outlined above that Senior Executives and Board members need to give significant, very special attention to the negative risk forces at play in the company’s operating environment. And because MeasuredRisk is committed to differentiating itself from its competitors on the basis of an ability to anticipate/predict these negative forces at play in a company’s business environment, and to thereby prevent the damage, the need is for significant attention being given to the negative forces at play in the environment. Prevention of damage rather than management of damage. Given the above goal on the part of MeasuredRisk, machine learning and artificial intelligence are important capabilities in support of MR’s goal of including the above prevention ability within our platform.

*Additional forces faced by a company operating on a global basis in foreign countries.

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