ACCA AFM Syllabus A. Role Of The Senior Financial Adviser - Identifying Risk - Notes ^{6 / 9}

Management must be aware of potential risks

They change as the business changes

So this stage is particularly important for those in turbulent environments

Uncertainty can come from any of the political, economic, natural, socio-demographic or technological contexts in which the organisation operates.

Categories of risk

• Strategic risks

  Refers to the positioning of the company in its environment. 

  Typically affect the whole of an organisation and so are managed at board level

• Operational risks

  Refers to potential losses arising from the normal business operations. 

  Are managed at risk management level and can be managed and mitigated by internal controls.

• Financial risks

  = are those arising from a range of financial measures. 

  The most common financial risks are those arising from financial structure (gearing), interest rate risk, liquidity

• Business risks

  The risk that the business won't meet its objectives.

  If the company operates in a rapidly changing industry, it probably faces significant business risk.

• Reputation risk

  Any kind of deterioration in the way in which the organisation is perceived

  When the disappointed stakeholder has contractual power over the organisation, the cost of the reputation risk may be material.

• Market risk

  Those arising from any of the markets that a company operates in, such as where the business gets its inputs, where it sells its products and where it gets its finance/capital

  Market risk reflects interest rate risk, currency risk, and other price risks

• Entrepreneurial risk

  The risk associated with any new business venture 
  In Ansoff terms, it is expressed the unknowns of the market reception

  It also refers to the skills of the entrepreneurs themselves. 

  Entrepreneurial risk is necessary because it is from taking these risks that business opportunities arise.

• Credit risk

  Credit risk is the possibility of losses due to non-payment by creditors.

• Legal, or litigation risk

  arises from the possibility of legal action being  taken against an organisation

• Technology risk

  arises from the possibility that technological change will occur

• Environmental risk

  arises from changes to the environment over which an  organisation has no direct control, 

  e.g. global warming, or occurrences for which the organisation might be responsible,

   e.g. oil spillages and other pollution.

• Business probity risk

  related to the governance and ethics of the organisation.

• Derivatives risk

  due to the use of underperforming financial instruments

• Fiscal risks

  risk that the new taxes and limits on expenses allowable for taxation purposes will change.

• Health and safety risk

  Health and safety risks include loss of employees' time because of injury and the risks of having to pay compensation or legal costs because of breaches. 

  Health and safety risks can arise from:   
  Lack of health and safety policy
  Lack of emergency procedures

• Liquidity risk

  If a business suddenly finds that it is unable to cover or renew its short-term liabilities, there will be a danger of insolvency if it cannot pay its debts 

  However current liabilities are often a cheap method of finance (trade payables do not usually carry an interest cost). 

  Businesses may therefore consider that, in the interest of higher profits, it is worth accepting some risk of insolvency by increasing current liabilities, taking the maximum credit possible from suppliers.