Hence, in order to ensure the integrity of the company's systems and financial operations and minimize the possibility of loss through mismanagement or fraud, the treasury department of the corporation can come to help. Through the formulation and implementation of a through risk management process, the likely and not very likely, both kind of unpleasing events can be avoided, and/or their damage minimized.
The primary objective of the treasury department would be to minimize and provide for the various types of risks confronted to the company. This main objective can be broken down in smaller aims and objectives, all forming elements of the broader risk management process. Risk management as an organizational process can be separated into five general activities: identify risks and determine tolerances; measure risks; monitor and report risks; control risks; and oversee, audit, tune, and realign the risk management process.
Risk identification is the process by which a company recognizes and, in some cases, detects the different financial risks to which it is exposed through the normal course of conducting its business. Risks can be left unidentified for reasons ranging from poor internal controls that allow the unnoticed booking of risky financial transactions to basic oversight of fundamental exposures. The process by which members of a company review, analyze, and discuss their risk profiles is an indispensable means by which risks can be identified, and, hence, managed.
Our airline company transports passengers from the United States to Europe and back. The obvious risks faced by the company include the risk of plane crashes, maintenance-related delays, equipment damage from fire, and a loss of customers. Less obvious but perhaps equally significant are also the financial risks to which our company may be subject, such as the risk of rising jet fuel prices or the risk of fluctuations in the euro/dollar exchange rate. Without a systematic process to analyze these different risk exposures, our company's shareholders may never realize fully the different avenues through which the value of their capital can be adversely affected.
Given the risks the company has identified, senior managers and directors must agree on tolerable levels of those risks required for the operation of the firm's primary business. This determination should be made explicitly by the firm's key stakeholders, including senior managers, the board of directors, and sometimes major creditors.
Risk measurement involves the quantification of certain risk exposures for the purpose of comparison to company-defined risk tolerances. The process by which different risks are quantified is a critical component in an organization's broad risk management program. Without a good measure of risk, a determination can be hard to reach about whether the company is taking too much of some types of risks-or, conversely, not enough of another.
Monitor and Report Risk
A third component of the risk management process is risk monitoring and reporting. The risks to which a firm is subject can change for two reasons. The first is a change in the composition of a company's assets or liabilities. To monitor changes in