What is Financial Management?

Financial management is about controlling the flow of

money in and out of the organization. Every business
needs to sell products or services, pay expenses,
balance the books, and file taxes. Financial
management encompasses all of this, along with more
complex processes, such as paying employees, buying
supplies, and submitting reports to government
agencies to show they’re obeying applicable laws and
regulations. The act of overseeing all these transactions
for a business is what we mean when we talk about a
company’s financial management. In general, the
bigger the company, the more complicated financial
management becomes.

Employees who specialize in financial management are

responsible for all the money going into and out of the
company. Smaller companies will have at least one
accountant or bookkeeper who works with the bank to
execute these transactions and track the flow of
money. Large companies will often have entire finance
teams led by a chief financial officer (CFO), controller,
head of finance, or someone with a similar title.
The finance team’s primary job is to make sure the
company stays solvent and never runs out of cash—but
it’s not their only job. They’re also responsible for
handling loans and debts, balancing the books,
overseeing investments, raising venture capital, and
managing public offerings (i.e. selling company stock on
the open market). Basically, the finance team protects
a company’s financial resources, monitors and controls
all transactions, and takes steps to make the company
as profitable as possible.

Key Takeaways

Financial management is all about monitoring,

controlling, protecting, and reporting on a company’s
financial resources.
Companies have accountants or finance teams
responsible for managing their finances, including all
bank transactions, loans, debts, investments, and other
sources of funding.
Finance teams are also responsible for ensuring the
company follows all regulations, stays solvent, and is as
profitable as possible.
What Is Risk Analysis?
The term risk analysis refers to the assessment process
that identifies the potential for any adverse events that
may negatively affect organizations and the
environment. Risk analysis is commonly performed by
corporations (banks, construction groups, health care,
etc.), governments, and nonprofits. Conducting a risk
analysis can help organizations determine whether
they should undertake a project or approve a financial
application, and what actions they may need to take to
protect their interests. This type of analysis facilitates a
balance between risks and risk reduction. Risk analysts
often work in with forecasting professionals to
minimize future negative unforeseen effects.

KEY TAKEAWAYS
Risk analysis seeks to identify, measure, and mitigate
various risk exposures or hazards facing a business,
investment, or project.
Quantitative risk analysis uses mathematical models
and simulations to assign numerical values to risk.
Qualitative risk analysis relies on a person's subjective
judgment to build a theoretical model of risk for a
given scenario.
Risk analysis can include risk benefit, needs
assessment, or root cause analysis.
Risk analysis entails identifying risk, defining
uncertainty, completing analysis models, and
implementing solutions.

Understanding Risk Analysis

Risk assessment enables corporations, governments,
and investors to assess the probability that an adverse
event might negatively impact a business, economy,
project, or investment. Assessing risk is essential for
determining how worthwhile a specific project or
investment is and the best process(es) to mitigate
those risks. Risk analysis provides different approaches
that can be used to assess the risk and reward trade off
of a potential investment opportunity.
Types of Risk Analysis
Risk-Benefits
Many people are aware of a cost-benefit analysis. In
this type of analysis, an analyst compares the benefits a
company receives to the financial and non-financial
expenses related to the benefits. The potential benefits
may cause other, new types of potential expenses to
occur. In a similar manner, a risk-benefit analysis
compares potential benefits with associated potential
risks. Benefits may be ranked and evaluated based on
their likelihood of success or the projected impact the
benefits may have.

Needs Assessment
A needs risk analysis is an analysis of the current state
of a company. Often, a company will undergo a needs
assessment to better understand a need or gap that is
already known. Alternatively, a needs assessment may
be done if management is not aware of gaps or
deficiencies. This analysis lets the company know
where they need to spending more resources in.

Business Impact Analysis

In many cases, a business may see a potential risk
looming and wants to know how the situation may
impact the business. For example, consider the
probability of a concrete worker strike to a real estate
developer. The real estate developer may perform a
business impact analysis to understand how each
additional day of the delay may impact their
operations.
Root Cause Analysis
Opposite of a needs analysis, a root cause analysis is
performed because something is happening that
shouldn't be. This type of risk analysis strives to identify
and eliminate processes that cause issues. Whereas
other types of risk analysis often forecast what needs
to be done or what could be getting done, a root cause
analysis aims to identify the impact of things that have
already happened or continue to happen.

How to Perform a Risk Analysis

Though there are different types of risk analysis, many
have overlapping steps and objectives. Each company
may also choose to add or change the steps below, but
these six steps outline the most common process of
performing a risk analysis.

Step #1: Identify Risks

The first step in many types of risk analysis to is to
make a list of potential risks you may encounter. These
may be internal threats that arise from within a
company, though most risks will be external that occur
from outside forces. It is important to incorporate
many different members of a company for this
brainstorming session as different departments may
have different perspectives and inputs.

A company may have already addressed the major risks

of the company through a SWOT analysis. Although a
SWOT analysis may prove to be a launching point for
further discussion, risk analysis often addresses a
specific question while SWOT analysis are often
broader. Some risks may be listed on both, but a risk
analysis should be more specific when trying to address
a specific problem.
Step #2: Identify Uncertainty
The primary concern of risk analysis is to identify
troublesome areas for a company. Most often, the
riskiest aspects may be the areas that are undefined.
Therefore, a critical aspect of risk analysis is to
understand how each potential risk has uncertainty
and to quantify the range of risk that uncertainty may
hold.

Consider the example of a product recall of defective

products after they have been shipped. A company may
not know how many units were defective, so it may
project different scenarios where either a partial or full
product recall is performed. The company may also run
various scenarios on how to resolve the issue with
customers (i.e. a low, medium, or high engagement
solution.

Step #3: Estimate Impact

Most often, the goal of a risk analysis is to better
understand how risk will financially impact a company.
This is usually calculated as the risk value, which is the
probability of an event happening multiplied by the
cost of the event.

For example, in the example above, the company may

assess that there is a 1% chance a product defection
occurs. If the event were to occur, it would cost the
company $100 million. In this example, the risk value of
the defective product would be assigned $1 million.

The important piece to remember here is

management's ability to prioritize avoiding potentially
devastating results. For example, if the company above
only yielded $40 million of sales each year, a single
defect product that could ruin brand image and
customer trust may put the company out of business.
Even though this example led to a risk value of only $1
million, the company may choose to prioritize
addressing this due to the higher stakes nature of the
risk.
Step #4: Build Analysis Model(s)
The inputs from above are often fed into an analysis
model. The analysis model will take all available pieces
of data and information, and the model will attempt to
yield different outcomes, probabilities, and financial
projections of what may occur. In more advanced
situations, scenario analysis or simulations can
determine an average outcome value that can be used
to quantify the average instance of an event occurring.

Step #5: Analyze Results

With the model run and the data available to be
reviewed, it's time to analyze the results. Management
often takes the information and determines the best
course of action by comparing the likelihood of risk,
projected financial impact, and model simulations.
Management may also request to see different
scenarios run for different risks based on different
variables or inputs.
Step #6: Implement Solutions
After management has digested the information, it is
time to put a plan in action. Sometimes, the plan is to
do nothing; in risk acceptance strategies, a company
has decided it will not change course as it makes most
financial sense to simply live with the risk of something
happening and dealing with it after it occurs. In other
cases, management may want to reduce or eliminate
the risk.

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