Risk Management Overview Paper

Risk Management Overview Paper

Risk Management Overview

Corporate risk is the dangers and liabilities an organization faces. With a struggling economy, corporate risk management is essential for a company to survive. The risk management teams are not willing to take chances in a struggling economy. A stressed economy leads to less credit being extended and consumers spending less. The risk management team is key to planning the current and future position of an organization. With an effective risk management program in place organizations can feel more at ease. The focus of this paper is to discuss and define some key financial terms.

Organizational Risk

The failure of internal processes, systems and people, or external events results in loss causing organizational risk. This type of risk causes tribulations and threats in an organization. In an organization a poor infrastructure can result in weak controls and poor communications with a variety of impacts on the business (Merna & AL-Thani, 2008). Some other external risks derive from changes in the atmosphere of the company, whether it is economic, political, sociological or technological changes. All these factors can have a less than favorable influence on the intentions and the policies of the company.

Business Risk

Business risk is the risk that a company will not have adequate cash flow to meet its operating expenses (Investopedia, n.d.). When a business is either unable to fully function or can only function unproductively, that leaves a risk of financial loss. This results in decrease revenue for the company causing an increase in cost for the consumer. Basically, business risk management is concentrated on the possible reduction in the value of a business that is caused by any source (Harrington & Niehaus, 2004). The corporation’s value to its shareholders, which is reflected in the value of the organization’s common stock, really depends on the variability related to the company’s future net cash flows. The major business risks that give rise to variation in cash flows and business value are price risk, credit risk, and pure risk (Harrington & Niehaus, 2004). These business risks, although very common, are more difficult to predict or estimate.

Financial Risk

A company that does not have adequate cash flow to meet their financial obligations is facing financial risk (Investopedia, n.d.). Most corporations manage financial risks separately from pure risks, often within separate departments, and the terminology and methods used by financial risk managers often differ from those used by pure risk managers (Harrington & Niehaus, 2004). The essence of financial risk is concerned with the organizations ability to pay its way. In practice, this covers a wide area,