Risk management: foresighted caution for commercial success

Risk management strategies are found in all areas of life. The business world, too, has developed specific methods for effective risk management. This involves identification, analysis, evaluation and monitoring of risks. These are used in a risk matrix, according to the factors of probability of occurrence and extent of damage.

The biggest threat to a company is insolvency. Hence risk management offers strategies to avoid insolvency.

Risk management prevents insolvency

Internal and external factors play a role in insolvency. Mistakes in planning and misjudgement by senior management team are some of the internal factors. Companies must recognise these in a timely manner and react accordingly. External factors however can generally not be influenced by the individual company. A department for risk management can hardly influence economic changes or the emergence of new competitors. However, these external factors can be closely monitored and appropriate precautions can be taken at an early stage.

Terms relating to risk management

Good risk management means keeping an eye on many dangers and their developments. For a manufacturing company, safety management is a very importance part of risk management. Technical risk may arise from various incidents, such as a power failure in production. It is the task of technical risk management to identify such dangers and to provide a qualified estimation: the probability of occurrence and the potential extent of damages is assessed. Risk management and company management use these two factors to derive the sum of funds used to avert the incident. In this example, the financing of emergency power generators could be included.

Financial risk management is about averting financial losses. Here the relevant risks include market price risk and liquidity risk. A company's liquidity risk is that it cannot obtain financial resources - for example in the form of loans - at the required conditions. This either means companies cannot be granted loans at all, or only at increased costs. This decision depends on the bank's own risk management. It assesses the company's credit rating and grants loans based on its analysis thereof. One risk management strategy to control this problem is to regularly monitor one's own credit rating.

Risk management: measures against credit risk

Containing credit risk is an important task within risk management. It is also referred to as the risk of default. Credit risk is one of the financial risks. The term refers to the danger that a debtor will not repay his loan at all, only partially, or too late. These defaults on loans impact the liquidity of companies and could contribute to their own insolvency.

Credit transactions are not just about bank loans. All other transactions and contracts where a company makes advance payment, is a short-term loan offer to the customer. An example is the ordering of goods on account. For the period between delivery and payment, the company grants a credit to its customer, thereby taking the risk that this credit will not be settled.

Successful risk management uses various methods to counteract non-payment. A key point is the avoidance of a risky business relationship. To do this, corporate risk management will enquire the credit rating of potential customers before any transaction. This procedure is common for telecommunications companies. They often check a person's creditworthiness before a mobile phone contract is concluded, Here, too, the company offers advance service.

 

Active risk management in customer relationships: credit assessment etc.

For active risk management, many businesses seek support and rfer to external service providers such as Arvato Financial Solutions. Automated credit checks of new and existing customers safeguard the risk of default. The following applies: the better the database, the more accurate the information. Scoring is one of the most common and effective ways to protect companies from damages. A comprehensive credit assessment not only reduces the risk of default, but also saves companies many subsequent costs for dunning and collection activities.

In terms of customer relations, risk management aims to identify high-risk customers and assess whether this business relation could be worthwhile. In case of doubt, a company avoids contact with the respective customer. For mail-order businesses, risk management uses checking mechanisms to detect fraudulent behaviour and conspicuous order patterns in advance.