The managing financial risks process focuses on managing an organization’s cash flow. Anything that relates to money flowing in and out of the business is a financial risk.
An effective financial risk management process is built on a set of well-defined and clearly stated business objectives. Key objectives articulate the ideal performance results that the company expects from that process. When determining what process improvements are needed to reach the next level of maturity, evaluators should consider the importance of the process being addressed. As the importance of a process increases, its desired capability increases.
This tool features several leading practices for the “managing financial risks” process, including:
- The company conducts its risk management activities to minimize negative cash flow events and potentially improve the shareholder value.
- Management considers risks a core treasury function fully supported by lines oversight, key talent and technology support, and actively works with line managers to formulate strategies and tactics.
- The company uses a formal review structure in which polices are reviewed and strategies are tested on models to stimulate performance under stressful market conditions.
- Senior management takes an active role in risk activities and strategy formulation. Risk positions and procedures are periodically reviewed, and direct communication lines with staff are always maintained.
- Senior treasury executives and their immediate staff have a working knowledge of all aspects of hedging and maintain direct communication with the board.