With the changing times, organizations need to follow a holistic approach towards risk management. Enterprise risk management has been gaining prominence in recent times paving the way for managing all the risks that a firm encounters in an integrated way. It is being noticed that there exists a linkage between the business and financial risks that a firm faces. The financial strategy of a firm has to be inline with all its other strategies and should effectively address the needs of the firm.
In recent times, the concept of Enterprise Risk Management (ERM) has caught the imagination of CEOs and CFOs across the world. But the concept itself has emerged from a simple insight. Business and financial risks must not be seen as watertight compartments. They should be managed in an integrated fashion. Where business risk is low, a firm can and should take higher financial risk. On the other hand, when business risk is high, financial risk must be low.
Business risk is nothing but the uncertainty associated with the operating cash flows of a business. The uncertainty is essentially about how much the firm can sell, at what price it can sell and what will be the operating expenses incurred in the process. These uncertainties are a direct outcome of the nature of the business and the firm's corporate strategy. The key issues here are— What are the firm's core competencies? What is its business model? How has the firm positioned itself in relation to its competitors? What is its competitive scope? So, to understand the linkages between business and financial risk, we need to understand how financial strategy emanates from corporate strategy. |
