Managing risk Featured

8:00pm EDT May 26, 2009

Monitoring and containing risks has always been important for businesses, but in today’s economy, the need to manage risk has become critical. By performing a holistic risk assessment, your organization can identify, analyze and mitigate risks, creating a culture of awareness and enhancing the organization’s value. Conducting a holistic risk assessment is especially important if your company operates in an industry hit hard by the current financial crisis.

“Organizations large and small can benefit from holistic risk assessments,” says Harry Cendrowski, CPA, ABV, CFF, CFE, CVA, CFD, CFFA, and managing director of Cendrowski Corporate Advisors LLC. “While many firms intensely monitor risks at a divisional or product-line level, a firm-level risk assessment can help the company better mitigate risks that may jointly affect differing areas of the organization.”

Smart Business learned more from Cendrowski about holistic risk assessments, why they’re so important and how they can benefit you and your business.

What is risk management?

Risk management is a process that identifies possible risk exposures an organization can face. It allows for the systematic evaluation and prioritization of risks while determining the likelihood of occurrence and the potential consequences if the risk occurs.

On the whole, risk management establishes what assets need to be protected, the value of those assets, the threats and vulnerabilities the company could face, the implications of those threats and vulnerabilities, and what can be done to minimize exposure to those risks.

A good risk management plan will contain appropriate controls and/or countermeasures to quantify each risk, and it should propose applicable and effective security controls for managing risks. The plan should also contain a schedule for control implementation and responsible persons for those actions.

What is involved in a holistic risk assessment strategy?

A holistic risk assessment involves three components: risk identification, analysis and mitigation. Organizational managers are often good at identifying and analyzing risks at the divisional or product-line level. However, in order for the risk management strategy to be effective, these managers need to look not only at the primary effects associated with individual risks but also at the correlation between identified risks across divisions and product lines.

If one of a firm’s product lines experiences a significant shock to its revenue, is it likely that another product line will experience a shock in tandem given the nature of the risk?

For example, if a supplier to a particular product line goes out of business, is it also likely that a supplier to another product line will meet the same fate given the nature of the risk?

By identifying highly correlated, risky events through a holistic risk management process, managers, boards and C-suite executives can move first to address these issues before proceeding to other risks. Without such a strategy in place, the firm could find itself facing significant issues occurring at the same time in separate divisions.

What are some key factors in successfully performing holistic risk assessments?

The act of performing a holistic risk assessment does not necessarily ensure its success in mitigating risks. It is a necessary condition but not a sufficient one. Many organizations actively perform risk assessments. However, the organization’s culture often hampers some part of the risk management assessment.

As an example, if the organization has sloppy data collection procedures, the information used in performing the risk assessment may lead to incorrect conclusions. On the other hand, even if accurate data are employed in a risk assessment, its success is predicated on management’s ability to shepherd the process throughout the organization. Weak management, or management’s indifference toward a risk assessment, can cripple the process.

Are there any types of businesses that are more susceptible to risks than others?

Firms using large degrees of leverage are particularly susceptible to risks because of the debt on their balance sheet. This leverage is often used to drive returns, but it also exposes the firm to significant downside risks. Firms with low debt-to-equity ratios, conversely, will generally be able to better weather an economic storm, all other things being equal.

Venture capital investments, for instance, are primarily equity investments with little to no leverage. While these types of assets experience shocks, there at least exists some downside cushion for venture investors due to the lack of leverage.

To take this point a step further, while the dot-com bubble and its subsequent bust were painful for many in the venture capital arena, it in no way catastrophically affected our financial system as did the current crisis. The current crisis’ shocks were made significantly more crippling due to the leverage employed by investment banks and homebuyers in their purchases.

Harry Cendrowski, CPA, ABV, CFF, CFE, CVA, CFD, CFFA, is managing director of Cendrowski Corporate Advisors LLC. Reach him at (866) 717-1607 or cs@cendsel.com, or visit the company’s Web site at www.cca-advisors.com.