Risk

Risk is basically the possibility of something bad happening. In business and finance, the risk is the chance that an investment’s actual outcome will differ from the expected outcome. Risks can include the possibility of losing all or some of the original investment in a business. However, risk can be calculated to some extent using historical data and market factors. It’s also important to note that the higher the risk an investor is willing to take, the greater the protentional return. No investment is free of risks, but there are some investments that have lower practical risks than others.

There are two main types of financial risk; they are systematic risks and unsystematic risks. Systematic risk can affect the entire economic market or a larger part of the market. This involves interest rate risk, inflation risk, sociopolitical risk, and currency risk. Unsystematic risks, on the other hand, are a type of risk that only affects a specific company or industry. This can be due to a change in management, new competitors in the market, regulatory changes that would affect sales, a product recall, etc.

What is Uncertainty

Uncertainty is basically a lack of certainty about an event. In finance and business, uncertainty implies that there is an inability to predict outcomes or consequences due to some lack of knowledge or data, which makes it impossible to make predictions. There can be multiple possible outcomes, but the possible outcomes are also not certain. COVID 19 pandemic situation is an example of making decisions under uncertainty. When the pandemic first hit, there was a lot of uncertainty – we didn’t know how to safeguard ourselves, how to continue our daily routine, etc.

What is the Difference between Risk and Uncertainty

The main difference between risk and uncertainty is that risk is measurable while uncertainty is not measurable or predictable.

Risk and uncertainty are two important terms in the world of finance and business. Although some tend to use these two terms interchangeably, there is a distinct difference between risk and uncertainty. Risk is the chance that an investment’s actual outcome will differ from the expected outcome, while uncertainty is the lack of certainty about an event.

Key Differences Between Risk and Uncertainty

The difference between risk and uncertainty can be drawn clearly on the following grounds:

The risk is defined as the situation of winning or losing something worthy. Uncertainty is a condition where there is no knowledge about the future events.
Risk can be measured and quantified, through theoretical models. Conversely, it is not possible to measure uncertainty in quantitative terms, as the future events are unpredictable.
The potential outcomes are known in risk, whereas in the case of uncertainty, the outcomes are unknown.
Risk can be controlled if proper measures are taken to control it. On the other hand, uncertainty is beyond the control of the person or enterprise, as the future is uncertain.
Minimization of risk can be done, by taking necessary precautions. As opposed to the uncertainty that cannot be minimised.
In risk, probabilities are assigned to a set of circumstances which is not possible in case of uncertainty.

What Is Financial Risk?

Financial risk is the possibility of losing money on an investment or business venture. Some more common and distinct financial risks include credit risk, liquidity risk, and operational risk.

Financial risk is a type of danger that can result in the loss of capital to interested parties. For governments, this can mean they are unable to control monetary policy and default on bonds or other debt issues. Corporations also face the possibility of default on debt they undertake but may also experience failure in an undertaking the causes a financial burden on the business.

Financial markets face financial risk due to various macroeconomic forces, changes to the market interest rate, and the possibility of default by sectors or large corporations. Individuals face financial risk when they make decisions that may jeopardize their income or ability to pay a debt they have assumed.

Financial risks are everywhere and come in many shapes and sizes, affecting nearly everyone. You should be aware of the presence of financial risks. Knowing the dangers and how to protect yourself will not eliminate the risk, but it can mitigate their harm and reduce the chances of a negative outcome.

Key Takeaways

Financial risk generally relates to the odds of losing money.
The financial risk most commonly referred to is the possibility that a company's cash flow will prove inadequate to meet its obligations.
Financial risk can also apply to a government that defaults on its bonds.
Credit risk, liquidity risk, asset-backed risk, foreign investment risk, equity risk, and currency risk are all common forms of financial risk.
Investors can use a number of financial risk ratios to assess a company's prospects.
Understanding Financial Risks for Businesses

Credit risk—also known as default risk—is the danger associated with borrowing money. Should the borrower become unable to repay the loan, they will default. Investors affected by credit risk suffer from decreased income from loan repayments, as well as lost principal and interest. Creditors may also experience a rise in costs for collection of the debt.

When only one or a handful of companies are struggling it is known as a specific risk. This danger, related to a company or small group of companies, includes issues related to capital structure, financial transactions, and exposure to default. The term is typically used to reflect an investor's uncertainty of collecting returns and the accompanying potential for monetary loss.

Businesses can experience operational risk when they have poor management or flawed financial reasoning. Based on internal factors, this is the risk of failing to succeed in its undertakings.

Financial Risks for Governments

Financial risk also refers to the possibility of a government losing control of its monetary policy and being unable or unwilling to control inflation and defaulting on its bonds or other debt issues.

Governments issue debt in the form of bonds and note to fund wars, build bridges and other infrastructure, and to pay for its general day-to-day operations. The U.S. government's debt—known as Treasurys—is considered one of the safest investments in the world.

The list of governments that have defaulted on debt they issued includes Russia, Argentina, Greece, and Venezuela. Sometimes these entities only delay debt payments or pay less than the agreed-upon amount; either way, it causes financial risk to investors and other stakeholders.

Financial Risks for the Market

Several types of financial risk are tied to financial markets. As mentioned earlier, many circumstances can impact the financial market. As demonstrated during the 2007 to 2008 global financial crisis, when a critical sector of the market struggles it can impact the monetary wellbeing of the entire marketplace. During this time, businesses closed, investors lost fortunes, and governments were forced to rethink their monetary policy. However, many other events also impact the market.

Volatility brings uncertainty about the fair value of market assets. Seen as a statistical measure, volatility reflects the confidence of the stakeholders that market returns match the actual valuation of individual assets and the marketplace as a whole. Measured as implied volatility (IV) and represented by a percentage, this statistical value indicates the bullish or bearish—market on the rise versus the market in decline—view of investments. Volatility or equity risk can cause abrupt price swings in shares of stock.

Default and changes in the market interest rate can also pose a financial risk. Defaults happen mainly in the debt or bond market as companies or other issuers fail to pay their debt obligations, harming investors. Changes in the market interest rate can push individual securities into being unprofitable for investors, forcing them into lower-paying debt securities or facing negative returns.

Asset-backed risk is the chance that asset-backed securities—pools of various types of loans—may become volatile if the underlying securities also change in value. Sub-categories of asset-backed risk involve the borrower paying off a debt early, thus ending the income stream from repayments and significant changes in interest rates.

Financial Risks for Individuals

Individuals can face financial risk when they make poor decisions. This hazard can have wide-ranging causes from taking an unnecessary day off of work to investing in highly speculative investments. Every undertaking has exposure to pure risk—dangers that cannot be controlled, but some are done without fully realizing the consequences.

Liquidity risk comes in two flavors for investors to fear. The first involves securities and assets that cannot be purchased or sold quickly enough to cut losses in a volatile market. Known as market liquidity risk this is a situation where there are few buyers but many sellers. The second risk is funding or cash flow liquidity risk. Funding liquidity risk is the possibility that a corporation will not have the capital to pay its debt, forcing it to default, and harming stakeholders.

Speculative risk is one where a profit or gain has an uncertain chance of success. Perhaps the investor did not conduct proper research before investing, reached too far for gains, or invested too large of a portion of their net worth into a single investment.

Investors holding foreign currencies are exposed to currency risk because different factors, such as interest rate changes and monetary policy changes, can alter the calculated worth or the value of their money. Meanwhile, changes in prices because of market differences, political changes, natural calamities, diplomatic changes, or economic conflicts may cause volatile foreign investment conditions that may expose businesses and individuals to foreign investment risk.

Pros and Cons of Financial Risk

Financial risk, in itself, is not inherently good or bad but only exists to different degrees. Of course, "risk" by its very nature has a negative connotation, and financial risk is no exception. A risk can spread from one business to affect an entire sector, market, or even the world. Risk can stem from uncontrollable outside sources or forces, and it is often difficult to overcome.

While it isn't exactly a positive attribute, understanding the possibility of financial risk can lead to better, more informed business or investment decisions. Assessing the degree of financial risk associated with a security or asset helps determine or set that investment's value. Risk is the flip side of the reward.

One could argue that no progress or growth can occur, be it in a business or a portfolio, without assuming some risk. Finally, while financial risk usually cannot be controlled, exposure to it can be limited or managed.

Pros

· Encourages more informed decisions

· Helps assess value (risk-reward ratio)

· Can be identified using analysis tools

Cons

· Can arise from uncontrollable or unpredictable outside forces

· Risks can be difficult to overcome

· Ability to spread and affect entire sectors or markets

Tools to Control Financial Risk

Luckily there are many tools available to individuals, businesses, and governments that allow them to calculate the amount of financial risk they are taking on.

The most common methods that investment professionals use to analyze risks associated with long-term investments—or the stock market as a whole—include:

Fundamental analysis, the process of measuring a security's intrinsic value by evaluating all aspects of the underlying business including the firm's assets and its earnings.
Technical analysis, the process of evaluating securities through statistics and looks at historical returns, trade volume, share prices, and other performance data.
Quantitative analysis, the evaluation of the historical performance of a company using specific financial ratio calculations.

For example, when evaluating businesses, the debt-to-capital ratio measures the proportion of debt used given the total capital structure of the company. A high proportion of debt indicates a risky investment. Another ratio, the capital expenditure ratio, divides cash flow from operations by capital expenditures to see how much money a company will have left to keep the business running after it services its debt.

In terms of action, professional money managers, traders, individual investors, and corporate investment officers use hedging techniques to reduce their exposure to various risks. Hedging against investment risk means strategically using instruments—such as options contracts—to offset the chance of any adverse price movements. In other words, you hedge one investment by making another.

Real World Example of Financial Risk

Bloomberg and other financial commentators point to the June 2018 closure of retailer Toys "R" Us as proof of the immense financial risk associated with debt-heavy buyouts and capital structures, which inherently heighten the risk for creditors and investors.

In September 2017, Toys "R'" Us announced it had voluntarily filed Chapter 11 bankruptcy. In a statement released alongside the announcement, the company's chair and CEO said the company was working with debtholders and other creditors to restructure the $5 billion of long-term debt on its balance sheet.

As reported in an article by CNN Money, much of this financial risk reportedly stemmed from a 2005 US$6.6 billion leveraged buyout (LBO) of Toys "R" Us by mammoth investment firms Bain Capital, KKR & Co., and Vornado Realty Trust. The purchase, which took the company private, left it with $5.3 billion in debt secured by its assets and it never really recovered, saddled as it was by $400 million worth of interest payments annually.

The Morgan-led syndicate commitment didn't work. In March 2018, after a disappointing holiday season, Toys "R" Us announced that it would be liquidating all of its 735 U.S. locations in order to offset the strain of dwindling revenue and cash amid looming financial obligations. Reports at the time also noted that Toys "R" Us was having difficulty selling many of the properties, an example of the liquidity risk that can be associated with real estate.

In November 2018, the hedge funds and Toys "R" Us' debt holders Solus Alternative Asset Management and Angelo Gordon took control of the bankrupt company and talked about reviving the chain. In February 2019, The Associated Press reported that a new company staffed with ex-Toys "R" Us' execs, Tru Kids Brands, would relaunch the brand with new stores later in the year. In late 2019, Tru Kids Brands opened two new stores—one in Paramus, New Jersey, and the other in Houston, Texas.

What Is Operational Risk Management?

Operational risk is the risk of loss resulting from ineffective or failed internal processes, people, systems, or external events that can disrupt the flow of business operations. The losses can be directly or indirectly financial. For example, a poorly trained employee may lose a sales opportunity, or indirectly a company’s reputation can suffer from poor customer service. Operational risk can refer to both the risk in operating an organization and the processes management uses when implementing, training, and enforcing policies. Operational risk can be viewed as part of a chain reaction: overlooked issues and control failures — whether small or large — lead to greater risk materialization, which may result in an organizational failure that can harm a company’s bottom line and reputation. While operational risk management is considered a subset of enterprise risk management, it excludes strategic, reputational, and financial risk.

What Are Examples of Operational Risk?

Operational risk permeates every organization and every internal process. The goal in the operational risk management function is to focus on the risks that have the most impact on the organization and to hold accountable employees who manage operational risk.

Examples of operational risk include:

Employee conduct and employee error
Breach of private data resulting from cybersecurity attacks
Technology risks tied to automation, robotics, and artificial intelligence
Business processes and controls
Physical events that can disrupt a business, such as natural catastrophes
Internal and external fraud

History of Operational Risk

Over the last two decades, the methodology for evaluating internal controls and risks has become more and more standardized. The standardization has been in response to government regulators, credit-rating agencies, stock exchanges, and institutional investor groups demanding greater levels of insight and assurance over risks and the effectiveness of controls in place to mitigate them. The release of COSO’s Internal Control-Integrated Framework in 1992 and the Sarbanes-Oxley Compliance Act of 2002, fueled by financial frauds at WorldCom and Enron, have led to increased pressure on the need for organizations to have an effective operational risk management discipline in place. In the U.S. the greatest pressure for increased involvement of senior executives in risk oversight comes from the audit committee. More recently, COSO released an Enterprise Risk Management Framework. After working with the frameworks for several years, risk managers have moved to an operational risk management process.

How Does Operational Risk Management Work?

When dealing with operational risk, the organization has to consider every aspect of all its objectives. Since operational risk is so pervasive, the goal is to reduce and control all risks to an acceptable level. Operational Risk Management attempts to reduce risks through risk identification, risk assessment, measurement and mitigation, and monitoring and reporting while determining who manages operational risk.

These stages are guided by four principles:

1. Accept risk when benefits outweigh the cost.

2. Accept no unnecessary risk.

3. Anticipate and manage risk by planning.

4. Make risk decisions at the right level.

Risk Identification

Operational Risk Management begins with identifying what can go wrong. As a best practice, a control framework should be used or developed to ensure completeness.

Risk Assessment

Once the risks are identified, the risks are assessed using an impact and likelihood scale.

Measurement and Mitigation

In the risk assessment, the risks are measured against a consistent scale to allow the risks to be prioritized and ranked comparative to one another. The measurement also considers the cost of controlling the risk related to the potential exposure.

Monitoring and Reporting

Risks are monitored through an ongoing risk assessment to determine any changes over time. The risks and any changes are reported to senior management and the board to facilitate decision-making processes.

What Is the Primary Objective of Operational Risk Management?

As the name suggests, the primary objective of Operational Risk Management is to mitigate risks related to the daily operations of an organization. The practice of Operational Risk Management focuses on operations and excludes other risk areas such as strategic risks and financial risks. While other risk disciplines, such as ERM, emphasize optimizing risk appetites to balance risk-taking and potential rewards, ORM processes primarily focus on controls and eliminating risk. The ORM framework starts with risks and deciding on a mitigation scenario.

Operational Risk Management proactively seeks to protect the organization by eliminating or minimizing risk.

Depending on the organization, operational risk could have a very large scope. Under the topic of operations, some organizations might categorize fraud risk, technology risks, as well as the daily operations of financial teams like accounting and finance. The Risk Management Association defines operational risk as “the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events, but is better viewed as the risk arising from the execution of an institution’s business functions.” Given this viewpoint, the scope of operational risk management will encompass cybersecurity, fraud, and nearly all internal control activities.

Applying a control framework, whether a formal framework or an internally developed model, will help when designing the internal control processes. One approach to understanding how ORM processes look in your organization is by organizing operational risks into categories like people risks, technology risks, and regulatory risks.

People

The people category includes employees, customers, vendors and other stakeholders. Employee risk includes human error and intentional wrongdoing, such as in cases of fraud. Risks include breach of policy, insufficient guidance, poor training, bed decision making, or fraudulent behavior. Outside of the organization, there are several operational risks that include people. Employees, customers, and vendors all pose a risk with social media. Monitoring and controlling the people aspect of operation risk is one of the broadest areas for coverage.

Technology

Technology risk from an operational standpoint includes hardware, software, privacy, and security. Technology risk also spans across the entire organization and the people category described above. Hardware limitations can hinder productivity, especially when in a remote work environment. Software too can reduce productivity when applications do increase efficiency or employees lack training. Software can also impact customers as they interact with your organization. External threats exist as hackers attempt to steal information or hijack networks. This can lead to leaked customer information and data privacy concerns.

Regulations

Risk for non-compliance to regulation exists in some form in nearly every organization. Some industries are more highly regulated than others, but all regulations come down to operationalizing internal controls. Over the past decade, the number and complexity of rules have increased and the penalties have become more severe.

Understanding the sources of risk will help determine who manages operational risk. Enterprise Risk Management and Operational Risk Management both address risks in the same areas but from different perspectives. In an effort to consolidate these disciplines, some organizations have implemented Integrated Risk Management or IRM. IRM addresses risk from a cultural point of view. Depending on the objective of the particular risk practice, the organization can implement technology with different parameters for teams like ERM and ORM.

How Many Steps Are in the ORM Process?

While there are different versions of the ORM process steps, Operational Risk Management is generally applied as a five-step process. All five steps are critical, and all steps should be implemented.

Step 1: Risk Identification

Risks must be identified so these can be controlled. Risk identification starts with understanding the organization’s objectives. Risks are anything that prevents the organization from attaining its objectives.

Step 2: Risk Assessment

Risk assessment is a systematic process for rating risks on likelihood and impact. The outcome from the risk assessment is a prioritized listing of known risks. The risk assessment process may look similar to the risk assessment done by internal audit.

Step 3: Risk Mitigation

The risk mitigation step involves choosing a path for controlling the specific risks. In the Operational Risk Management process, there are four options for risk mitigation: transfer, avoid, accept, and control.

1. Transfer: Transferring shifts the risk to another organization. The two most often means for transferring are outsourcing and insuring. When outsourcing, management cannot completely transfer the responsibility for controlling risk. Insuring against the risk ultimately transfers some of the financial impact of the risk to the insurance company. A good example of transferring risk occurs with cloud-based software companies. When a company purchases cloud-based software, the contract usually includes a clause for data breach insurance. The purchaser is ensuring the vendor can pay for damages in the event of a data breach. At the same time, the vendor will also have their data center provide SOC reports that show there are sufficient controls in place to minimize the likelihood of a data breach.

2. Avoid: Avoidance prevents the organization from entering into the risk situation. For example, when choosing a vendor for a service, the organization could choose to accept a vendor with a higher-priced bid if the lower-cost vendor does not have adequate references.

3. Accept: Based on the comparison of the risk to the cost of control, management could accept the risk and move forward with the risky choice. As an example, there is a risk that an employee will burn themselves if the company installs new coffee makers in the breakroom. The benefit of employee satisfaction from new coffee makers outweighs the risk of an employee accidentally burning themselves on a hot cup of coffee, so management accepts the risk and installs the new appliance.

4. Control: Controls are processes the organization puts in place to decrease the impact of the risk if it occurs or to increase the likelihood of meeting the objective. For example, installing software behind a firewall reduces the likelihood of hackers gaining access, while backing up the network decreases the impact of a compromised network since it can be restored to a safe point.

Step 4: Control Implementation

Once the risk mitigation choice decisions are made, the next step is implementation. The controls are designed specifically to meet the risk in question. The control rationale, objective, and activity should be clearly documented so the controls can be clearly communicated and executed.The controls implemented should focus preventive control activities over policies

Step 5: Monitoring

Since the controls may be performed by people who make mistakes, or the environment could change, the controls should be monitored. Control monitoring involves testing the control for appropriateness of design, implementation, and operating effectiveness. Any exceptions or issues should be raised to management with action plans established.

Within the monitoring step in Operational Risk Management, some organizations, especially in the financial industry, have adopted continuous monitoring/early warning systems built around key risk indicators (KRIs). Key risk indicators are metrics used by organizations to provide an early signal of increasing risk exposures in various areas of the enterprise. KRIs designed around ratios that are monitored by business intelligence applications are how banks can manage operational risk, but the concept can be applied across all industries. KRIs can be designed to monitor nearly any potential risk and send a notification. As an example, a company could design a key risk indicator around customer satisfaction scores. Falling customer satisfaction scores could indicate that customer service representatives are not being trained or that the training is ineffective.

oStatef Operational Risk Management

Source: Global Risk Oversight Report

In the last five years, U.S. organizations have experienced significant increases in the volume and complexity of risks, with 32% of companies experiencing an operational surprise in that time period (see figure above). As organizations grow and evolve, so do the complexity, frequency, and impact of risks that are poorly managed. Losses from failure to properly manage operational risk have led to thedownfall of many financial institutions — with over 100 reported losses exceeding $100 million in recent years. Moreover, growing pressure from the board for increased risk oversight also points to the importance of having a strong operational risk management practice in place. But how many organizations actually do?

According to a 2017 ERM Initiative study commissioned by the Association of International Certified Professional Accountants, risk management practices around the world are relatively immature: less than 30% of global organizations have “complete” enterprise risk management processes in place. This may suggest that there is a disconnect between operational and enterprise risk management and strategy execution in organizations.

What Are the Challenges and Shortcomings of Operational Risk Management?

In many organizations, operational risk management is one of the most tenuous links in their ability to meet the demands of customers and stakeholders. While operational risk management is a subset of enterprise risk management, similar challenges like competing priorities and lack of perceived value affect proper development among both programs. Some common challenges include:

A common perception that organizations do not have sufficient resources to invest in operational risk management or ERM.
Need for greater communication and education around the importance of operational risk management and the consequences of operational failures on a company’s bottom line.
Need for increased awareness and appreciation across boards and C-suite executives to better understand operational risk management steps.
Lack of consistent methodologies to measure and assess risk is an area of concern when it comes to providing an accurate portrait of an organization’s risk profile.
Establishing standard risk terminology that will be used moving forward, which is conducive to successful Risk and Control Self-Assessments (RCSAs).
The process is varied and complex due to changes in technology.
The function is oftentimes lumped in with other functions such as compliance and IT which is why it does not receive significant attention.
Operational Risk Management programs can be manual, disjointed, and over-complicated, mostly because ORM developed as a reactive function in response to regulations and compliance.

What Are the Benefits of a Strong Operational Risk Management Program?

Establishing an effective operational risk management program is helpful for achieving an organization’s strategic objectives while ensuring business continuity in the event of disruptions to operations. Having a strong ORM also demonstrates to clients that the company is prepared for crisis and loss. Organizations that can effectively implement a strong ORM program can experience improved competitive advantages, including:

Better C-suite visibility.
Better informed business risk-taking.
Improved product performance and better brand recognition.
Stronger relationships with customers and stakeholders.
Greater investor confidence.
Better performance reporting.
More sustainable financial forecasting.

How to Develop an Operational Risk Management Program?

As organizations begin the process of creating an operational risk framework and program, some areas that the risk management team should focus on include:

Promoting an organization-wide understanding of the program’s value and function.
Leveraging technology to implement an automated approach to monitoring and collecting risk data.
Establishing an effective method for evaluating and identifying principal risks in the organization and a way to continuously identify and update those risks and associated measures.
Focus on helping the organization reduce material risk exposures while encouraging activities where the potential business benefits outweigh the risks.
Focus on partnering ORM with other functions in the organization to better embed best practices into the organization.

The Risk and Control Self-Assessment

Developing an operational risk program begins with risk management teams engaging with business process owners in identifying the risks and controls in the organization. While every organization will approach measuring operational risk differently, one of the first steps to understanding the nature of operational risks in your organization is through a Risk and Control Self-Assessment (RCSA).

The RCSA is a framework that provides an enterprise view of operational risk and can be used to perform operational risk assessments, analyze your organization’s operational risk profile, and chart a course for managing risk. The RCSA forms an important part of an organization’s overall operational risk framework. An RCSA requires documentation of risks, identifying the risk levels by estimating the frequency and impact of risks and documenting the controls and processes related to those risks. A general best practice for organizing the assessment approach is by conducting the RCSA at the business-unit level.

The RCSA should be developed to serve as a reference for your organization’s risk initiatives. Below are several leading industry best practices for developing your Risk and Control Self-Assessment:

Integrate Risk and Control Self-Assessment programs into your operational risk initiatives.
Establish a standard risk terminology and consistent methodologies to measure and assess risk.
Develop a complete view of risks and controls — this will be important for later analysis.
Incorporate a trend analysis methodology into your RCSA that can identify patterns in risk as well as potential control failures.
Incorporate a method for identifying non-financial risks that may have impacts that can harm your bottom line.
Use your RCSA to budget for operational risk management initiatives.

Operational Risk Management Tools and Resources

Technology enablement increases the value Operational Risk Management brings to the organization. When planning the Operational Risk Management function, consider building the library of risks and controls and the risk assessment process into a risk management application. Establishing effective risk management capabilities is an important part of driving better business decisions and is an important tool the C-suite leverages for competitive advantage. Embedding the processes with technology ensures these are applied consistently. A strong Operational Risk Management program can help drive your operational audits and risk library, as well as your SOX and Cybersecurity compliance programs. Find out how AuditBoard can help you manage, automate, and streamline your operational risk management program, and help you turn your operational risks into opportunities to gain a competitive advantage.

Risk in Recruitment Risk in organizational activities mainly refers to the possibility of failure in carried out activities. In particular, this is related to the occurrence of events independent of the functioning subject, which cannot be precisely foreseen and consequently prevented. Such events can affect the decrease in useful resulting outcomes and/or the increase in expenditure, which makes actions totally or partially effective, beneficial or economical. Thus, risk is the probability of incurring a loss.

The complexity of the recruitment process can cause many mistakes, which lead to the risk of employing an inadequate employee. The most common mistake is a disrespectful approach to the recruitment process (devoting too little time to it, relying on chance). This activity introduces a big risk of making an incorrect decision, which may impact the quality of work team and, consequently, the further development of the enterprise in the future.

Taking into account these considerations, we can classify types of risk in recruitment. In this case, we can talk about the risk in terms of:

1. Incorrect estimation of personnel needs both in terms of quantity and quality;

2. Incorrect selection of sources and recruitment methods;

3. Deficiencies in the documentation and misinterpretation of the information contained therein.

Various Risks in Recruitments

1- Risk of employing too few or too many employees.

2- The risk that the recruitment process is too cost-intensive.

3- The risk of using an overly specialized method.

4- The risk of maladjustment to job offers.

5- The risk of limited effectiveness of the candidate search.

6- The risk that the recruitment process is too cost-intensive.

7- The risk of using an overly specialized method.

8- The risk of maladjustment to job offers.

9- The risk of limited effectiveness of the candidate search.

What is workflow design?

Workflow design is the visual depiction of the steps involved in a workflow from start to finish. A typical workflow design lays out each task sequentially and provides complete clarity into how data moves from one task to another.

What’s the right way to design workflows? Paper or whiteboards are good for the initial idea, but to actually run the workflow you are going to need something more robust

A workflow design tool allows you to graphically depict the various tasks involved as well as performers, timelines, data, and other aspects crucial to execution. It helps you weave in multiple scenarios and complexities while keeping your eye on the end goal.

What does a workflow design tool do?

But will any workflow design tool do? Unfortunately, not all workflow design softwares are created equal.

Here’s a list of critical features you should look for when shopping for workflow design tools.

Important features in a workflow design tool

These features mentioned below are non-negotiable for effective workflow design.

No-code builder

Not everyone who is responsible for a workflow in your organization is equipped with programming knowhow. But that doesn’t mean they need to spend weeks waiting for an engineer to be available to create their workflow. Your choice of workflow design software should have a no-code, intuitive interface, perfect for business users. It also requires drag-and-drop building capability to simplify the whole initiative.

Task assigning

A seemingly obvious but critical feature is the ability to assign tasks. This improves accountability and transparency when the workflow is being executed. It also contributes towards greater clarity. But task assigning can get complicated in larger organizations. What if you always want someone’s manager to approve a task? Or you want to pull out an approver based on a unique chart? Or a formula? These features should be built into your workflow design tool.

Collaboration

The best workflows are collaborative. The workflow design tool you choose should facilitate inputs from everyone involved in the tasks. It helps create a comprehensive picture rather than a limited one, which could go on to hinder efficiency.

Copy, export, and share

Application of workflow design is just as important as the creation, if not more. Towards this end, effective workflow design tools have capabilities such as copy, export, and share. You often need to replicate a workflow with small changes for another department, or you want to show the data you’ve collected. These features make it much easier the more reliant you get on automated processes.

Sub-workflows

Sometimes, a few tasks within a workflow can be grouped together in a sub-workflow for better organization. When workflow design tools allow you to create sub-workflows, it enables simplification, flexibility, and better testing for bottlenecks and errors.

Business rules

Business rules are necessary to ensure consistency and efficiency in workflows. Look for the capability to create simple or complex business rules with ease. After all, no two workflows are alike.

Approvals

In some workflows, there could be scenarios where approval is required from more than one authority. An instance of this is when an expense reimbursement request crosses a certain threshold. It may require approval from the line manager, department head, payments team, as well as the head of finance department. Make sure that your workflow design tool can enable single or multi-tiered approvals for all possibilities.

Varied workflow types

A typical organization usually has a combination of sequential (tasks are performed one after another) and parallel (tasks can happen simultaneously and not linearly) workflows. The right workflow design software will allow you to be able to create all types of workflows with the same level of ease.

Reminders and custom notifications

While designing workflows, reminders and notifications are essential to minimize delays and bottlenecks. Workflow design tools should have features that let you add reminders and customize the type of notifications received. This can be very effective to execute workflows within desired timelines.

Timeouts and waits

In practical application, not all workflows are completed in one go. There may be times when you need to pause a workflow for a certain amount of time or wait until a specific action has been completed before proceeding with the rest of it. Competent workflow design tools have options to include timeouts and wait conditions to accommodate these situations.

What does a workflow design tool do?

But will any workflow design tool do? Unfortunately, not all workflow design softwares are created equal.

Here’s a list of critical features you should look for when shopping for workflow design tools.

Important features in a workflow design tool

These features mentioned below are non-negotiable for effective workflow design.

No-code builder

Task assigning

Collaboration

Copy, export, and share

Sub-workflows

Business rules

Business rules are necessary to ensure consistency and efficiency in workflows. Look for the capability to create simple or complex business rules with ease. After all, no two workflows are alike.

Approvals

Varied workflow types

Reminders and custom notifications

Timeouts and waits

Now that you have a robust knowhow of what the perfect workflow design software should feature, you’re probably wondering how to design a workflow.

Ready to see a Workflow Design Tool in action?

Getting a workflow design project started

Starting a workflow design project may seem daunting but logic and clarity of thought can simplify the whole initiative.

Choose the process

Which workflow requires streamlining at the earliest? Pick one that you feel needs most improvement in efficiency.

Identify resources

Delve into the resources involved in the workflow you’ve chosen such as people, materials, technology, budgets, and others.

List out tasks

Make an exhaustive list of all the tasks involved from start to finish. Understand what order they are performed in as well as timeframes for each task.

List out performers

Understand who is responsible for each of the tasks as well as where approvals are required and assign roles.

Factor in inputs and outputs

Include all other details that are essential to the functioning of the workflow such as instructions, data, checklists, sources, and references.

Design using the tool

Create a visual representation of your workflow with your chosen software. Make sure to include logical loops, conditions, and custom notifications.

Collaborate

Share the workflow design with your team and incorporate inputs from task performers and other stakeholders for a comprehensive effort.

Test

Execute a test run to identify and fix loopholes and possible problem areas to improve the workflow.

Deploy

Once the workflow meets requirements, deploy and monitor progress.

What is workflow documentation, and why is it important?

Workflow documentation is the process of storing, tracking, and editing business documents that shape your workflow.

In other words, workflow documentation outlines your business processes and workflows

Workflow documentation helps you improve your processes, streamline your workflow, and align your team.

5 easy steps of workflow documentation from beginning to end

Now, let’s take a look at 5 simple steps you can follow to start effectively using workflow documentation.

1. Define the process

First things first, you need to outline the process of the workflow. It’ll be a top-level overview of what you envisage the specific workflow to involve.

To do this, we’d suggest reviewing the following information:

· Where the workflow begins

· Where the workflow ends

· Any milestones to hit along the way

· What’s involved at each stage of the workflow

There are a couple of options to help you visualize this information. You can use a workflow chart or diagram to picture your document workflow from start to finish.

Example of a workflow chart for ordering supplies designed by Smartdraw

What is the meaning of delegation?

The delegation of authority refers to the division of labor and decision-making responsibility to an individual that reports to a leader or manager.

It is the organizational process of a manager dividing their own work among all their people. It involves giving them the responsibility to accomplish the tasks that are delegated to them in the way they see fit.

Along with responsibility, they also share the corresponding amount of authority. This ensures that tasks can be completed efficiently and that the individual feels actually responsible for their completion.

On one level, delegation is just dividing work into tasks that others can do.

At its best, delegation is empowering people to do the work they are best suited to. It allows them to invest themselves more in the work and develop their own skills and abilities. It also allows the manager to do other important work that might be more strategic or higher-level.

In other words, delegated authority is more than just parsing out work. It is truly sharing responsibility, ownership, and decision-making. Delegated authority is shared authority.

There are three central elements involved in the delegation of authority

1. Authority

In the context of a company, authority is the power and right of an individual to use and allocate their resources efficiently.

This includes the ability to make decisions and give orders to achieve the organizational objectives and goals.

This component should always be well-defined. Everyone with authority should know the scope of their authority.

Essentially, it is the right to give a command, meaning the top-level management always has the greatest authority.

There is a symbiotic relationship between authority and responsibility. So, authority, especially authority in management, should always be accompanied by an equal amount of responsibility if the task is to be completed successfully.

Similarly, there has long been a relationship between power and influence. Learn what this relationship should look like in our article: Power versus influence: How to build a legacy of leadership.

2. Responsibility

This refers to the specifics and scope of the individual to complete the task assigned to them.

Responsibility without adequate authority can lead to:

Discontent
Dissatisfaction
Conflicts
Frustration for the individual

While authority flows from the top-down, responsibility flows from the bottom-up. Middle management and lower-level management hold more responsibility.

3. Accountability

Unlike authority and responsibility, accountability cannot be delegated. Rather, it is inherent in the bestowment of responsibility itself.

Anyone who sets out to accomplish a task and take on a job in a company becomes accountable for the outcome of their efforts.

Accountability, in short, means being answerable for the end result. Accountability arises from responsibility.

Authority flows downward, whereas accountability flows upward. The downward flow of authority and upward flow of accountability must be the same at each position of the management hierarchy.

The importance of delegation

Delegating has been shown to improve task efficiency and benefit the organization in ways that aren't obvious at first.

A study by Harvard Business Review determined that delegating can actually increase organizations’ income and overall efficiency.

Not only does delegation empower others in the organization, but it also helps optimize the performance of the group.

Delegating empowers your team, builds trust, and motivates.

Thoughtful delegation, with support, is also a way to stretch and develop people within the work. This is often more powerful than through periodic professional development.

6 steps to effective delegation in management

1. Plan and prepare

Before starting a formal delegation process, take the time to think through the task and decide who you’ll delegate to and the outcome you want.

In addition, identify a goal and purpose for the delegated functions. Your goal will determine the approach you take.

2. Discuss the task to be delegated

Engage the employee in a specific conversation about the task you want to delegate. Then make sure you both are in agreement regarding the task and the outcome you desire.

This step is useful to set expectations and state the quality of work that needs to be completed.

It is also useful to state why you are delegating the task to that person.

Alex Cavoulacos, the founder of The Muse, says:

“When you select people to delegate to, tell them why you chose them specifically and how you hope to see this help them grow.”

3. Identify the deadline for completion

Make sure your deadline is realistic and achievable.

This is particularly important when delegating a stretch goal or something the person has not done before.

If you think the employee might need some revision time, build it upfront. This ensures that you do not end up at the deadline with an outcome that is different from the one you wanted.

When setting the deadline, consider where the delegated task fits in with the person’s existing job responsibilities.

4. Outline the level of authority

Clearly outline the level of authority you want the person to have. Different levels of authority include the following.

Recommend. If the risk associated with the task is high or the person has little experience, you may ask the person for a recommendation on a course of action. But you make the final decision.

Inform and initiate. If the risk associated with the task is moderate and the person has some experience, the person will inform you before they take action.

Act. The person has full authority to act on his or her own if either the risk associated with the task is low or the person has plenty of experience.

5. Build in checkpoints or progress reports

Set regular checkpoints right at the beginning to provide support and follow-through. You can use checkpoints to review the work and give feedback or even provide encouragement and coaching.

6. Conduct a final debriefing

The final debriefing consists of a two-way discussion about how the delegated task went.

Debriefing involves a mutual inquiry:

Ask the employee to reflect on their own performance on the task or project. It helps to ask questions, such as what they thought went well, what they thought could have been better about the project, and what they would do differently if they could do it again.
Provide feedback on how you think they did
Have the person provide feedback on your performance as a delegator. Again, specific questions can be helpful: Where could I have been more clear? What other types of support would have been helpful to you?

Delegation of authority case studies

In order to further illustrate what delegation of authority in management looks like, let’s take a look at three case studies:

Delegation of authority case study 1:

Seth Kehne, the owner of Lawn Butler in East Tennessee, started his company in 1999. He watched it grow slowly from a small side business, then suddenly he realized revenue had doubled.

But because the growth was gradual, he never took steps to put a management system in place for a larger company. With everyone reporting to Kehne, he was stretched thin.

It limited the company’s growth because managers didn’t feel they had the freedom to do their jobs without his approval.

Plus, as the chief executive officer, Kehne was working too many hours “managing instead of delegating.”

“By failing to delegate, I’d been holding back my managers. They didn’t have the complete authority they needed to do what they needed to do.” Kehne says.

Part of the solution was to implement an organizational chart. It included managers’ new duties and delegated responsibilities.

It also reduced the number of people reporting directly to Kehne from more than 20 down to four.

“To be honest, I thought I had already delegated a lot of my responsibilities. But once we had this organization chart in place, I realized that I really hadn’t,” Kehne shared.

As managers and employees assumed their new roles, operations became increasingly smoother. This allowed for even more growth.

“Things just operate better now,” Kehne said, adding sales are up 50% since he implemented the change two years ago.

Other improvements include:

Better work hours thanks to more efficient operations (at least five to 10 fewer hours per week)
Positive customer response
Better employee job satisfaction

Delegation of authority case study 2:

Jane is a senior manager at an IT firm and has a team member Amanda who reports directly to her.

Things have not been smooth for them for the last few weeks. In the last project that Jane delegated to Amanda, she started to feel she would be better off doing it herself.

While Amanda is willing to take on additional assignments, she just doesn’t seem to be willing to be responsible for the assignment. She won’t do anything without first checking in with Jane.

The last time Amanda came into the office, Jane told her to forget what she is doing, and she’ll give it to someone else who can handle the assignment. After Amanda left, Brian realized she didn’t handle that well.

Jane later sat down with Amanda to discuss the situation further and figured out how best to proceed in collaboration with Amanda. She apologized to Amanda for how she handled the last encounter and realized that she had to delegate the tasks differently to Amanda.

She asked Amanda to help her understand why she feels like she cannot take steps to complete an assignment.

Through an honest conversation with Amanda, Jane learned how best to delegate to Amanda.

Through a conversation, Jane learned more about her skills and experiences and where her comfort level is. This will enable Jane to more effectively manage delegated assignments.

What Is an Internal Auditor (IA)?

An internal auditor (IA) is a trained professional employed by companies to provide independent and objective evaluations of financial and operational business activities, including corporate governance. They are tasked with ensuring that companies comply with laws and regulations, follow proper procedures, and function as efficiently as possible

An internal audit generally performs the three tasks outlined below.

Assess any risks and the internal controls within a company
Ensure that a company and its employees are in compliance with federal and state laws and regulations
Make suggestions as to what needs to be done to rectify a failed audit or issues that were identified as problematic during the audit

MBA FM05 Unit 4

What is the Difference between Risk and Uncertainty

The main difference between risk and uncertainty is that risk is measurable while uncertainty is not measurable or predictable.

Key Differences Between Risk and Uncertainty

What Is Financial Risk?

Key Takeaways

Financial Risks for Governments

Financial Risks for the Market

Financial Risks for Individuals

Pros and Cons of Financial Risk

Tools to Control Financial Risk

Real World Example of Financial Risk

What Is Operational Risk Management?

What Are Examples of Operational Risk?

History of Operational Risk

How Does Operational Risk Management Work?

Risk Identification

Risk Assessment

Measurement and Mitigation

Monitoring and Reporting

What Is the Primary Objective of Operational Risk Management?

People

Technology

Regulations

How Many Steps Are in the ORM Process?

Step 1: Risk Identification

Step 2: Risk Assessment

Step 3: Risk Mitigation

Step 4: Control Implementation

Step 5: Monitoring

oStatef Operational Risk Management

What Are the Challenges and Shortcomings of Operational Risk Management?

What Are the Benefits of a Strong Operational Risk Management Program?

How to Develop an Operational Risk Management Program?

The Risk and Control Self-Assessment

Operational Risk Management Tools and Resources

What does a workflow design tool do?​

Important features in a workflow design tool​

No-code builder

Task assigning

Collaboration

Copy, export, and share

Sub-workflows

Business rules

Approvals

Varied workflow types

Reminders and custom notifications

Timeouts and waits

What does a workflow design tool do?​

Important features in a workflow design tool​

No-code builder

Task assigning

Collaboration

Copy, export, and share

Sub-workflows

Business rules

Approvals

Varied workflow types

Reminders and custom notifications

Timeouts and waits

Ready to see a Workflow Design Tool in action?

Getting a workflow design project started

Choose the process

Identify resources

List out tasks

List out performers

Factor in inputs and outputs

Design using the tool

Collaborate

Test

Deploy

What is workflow documentation, and why is it important?

5 easy steps of workflow documentation from beginning to end

1. Define the process

What is the meaning of delegation?

1. Authority

2. Responsibility

3. Accountability

The importance of delegation

6 steps to effective delegation in management

What does a workflow design tool do?

Important features in a workflow design tool

What does a workflow design tool do?

Important features in a workflow design tool