Financial Risk


In the United States we take water for granted.    We turn the tap, open the valve, punch the button and water flows out to meet whatever the demand is.  Not only do we expect the water to come on demand, but we have high expectations for the quality of the water.   When the water doesn’t meet the stringent requirements demanded by government for public safety, the supplier is faced with a potential mountain of cost that runs the gambit of medical coverage for people getting sick, to clean up and production losses, litigation expense and damage to both the providers brand and the customers it provides.  If the provider is smart, they have build back up systems for the back up systems, developed contingency plans for natural and man made disasters and tested both the systems and plans to make sure that everything works according to plan.  Additionally these plans are periodically reviewed to make sure that there are no new systems, technology and/or threats that should be addressed.

Water providers will also look to see how the risks they face can be minimized or transferred as well.  The newest transfer method is through Water Resiliance Insurance offered by AON.   The program is geared to water utility companies and provides not only traditional contaminants insurance, but also forensic analyses, cleaning and flushing of the water system, transportation costs, employee overtime and for third party financial losses.  The first policy was written in for Anglian Water recently.

It’s good to remember that our usable water was not so protected.  In the 1800′s the  water used for the city was usually drawn from a source up river from the sewage treatment area, or the town itself to provide protection from the sewage that entered the water down river.  Unfortunately down river was another town that practiced the same process.    Unsafe and contaminated water was the norm, not the exception. 

In many areas, clean and safe drinking water is the exception.  Managing Business Risk is joining with other bloggers today through blogactionday.change.org  to promote the United Nations efforts to bring clean, safe water to millions of individuals where it is not currently available.  Please join me in supporting this worthwhile cause and sign the petition.

Change.org|Start Petition

Let’s face it any venture is faced with risk.  We’ve all heard “No Risk, No Reward” and no one would disagree with Earl Nightingale comment “wherever there is danger, there is opportunity, wherever there is opportunity there is danger, the two are inseparable, they go together”.  These comments support how we have previously defined risk (see what is risk). 

Understanding that all things worth doing contain an element of risk is the first step in developing and implementing a risk management program, heck it’s the first word in RISK management.  In order to manage risk, the various risks need to be identified, and assessed for the probability of the event occurring and the impact the event would have on the business

When developing a risk assessment, an organization should create a list of all the risks that it faces, and drilling down, the reason these risks are listed.  Hopefully the list will be generated by a number of individuals within the organization who have different perspectives of risk.  A customer service manager will have a different view of the risks that he/she face as compared to the CFO of the company, or the VP of Sales.  I believe identifying all risks is important.

As the risk list is being developed, the individual risks will be dropping into several broad categories.  These categories identify not only the major focus of the risks, but also provide a road-map on defining the risk and suggested ways to address them.

Typically all the risks will fall into three categories:

  • Strategic- the risks that are associated with the environment the business operates in including marketplace or industry, regulatory issues, competition, reputation, stakeholders, and technology/obsolescence.
  • Financial – The risks to a companies financial strength including cash flow, profit margins, debt and credit management, interest rate fluctuation, and reserve requirements.
  • Operational – The risks involved in the functional operation of the organization like supply chain, fraud, security, human resources, projects, natural and man made disasters, systems and equipment.

Naturally each of these broad risk categories contain sub categories, and the sub categories break down further into additional sub categories that help to clarify and legitimize the concerns these risks pose.

In the next segment of Risk Management 101 we will look at some of the ways to develop the “Risk List”.