Wednesday, January 08, 2020

MBA in a Nutshell #19 - Accounting and Finance : Risk management

We're opening a new year to discuss Chapter 2 of the book MBA in a Nutshell. As it turns out the accounting and finance section of most MBA sections are structured very differently from the CFA syllabus. CFA charter-holders assess an investment as an outsider looking in whereas MBAs use their knowledge to manage a company from an insider's perspective. The author also disclaims that the book focuses on the managerial aspects of accounting and not the financial aspects of accounting that focuses more on compliance.

The chapter opens with the most important tasks performed by Chief Financial Officers or CFOs - Risk Management. As it turns out, doing risk management for a company is a complicated task requiring the support of a multidisciplinary workforce.

Risk Management covers the following :

a) Business Partners - How dependent is the company on them ? This requires knowledge on legal aspects of the relationship as well as an understanding of their culture.

b) Adversaries - What is our competitor's market share ?  Do we have intelligence on them ? Are they spying on us ?

c) Customers - What credit risk do they pose ? Do we have product liabilities ?

d) Intermediaries - Can the intermediaries deliver ? What is their cost of distribution ?

e) Financial considerations - How much forex risk are we exposed to ?

f) Operational - This occupies a lot of time as it covers issues like systems downtimes and physical security.

g) Human Resources - What are our staffing needs ? What are HR policies like ?

h) Political - Is there a risk of terrorism or war ?

g) Legal - How do we protect our intellectual property ? Is there ongoing litigation ?

h) Reputation risk - Is the corporate image vulnerable to attacks ?

i) Strategic considerations - How are resources planned and allocated ?

I was actually quite surprised at how broad this subject matter is. In fact, it is plain unfair to make risk management under one CFO - the whole company should play a role in risk management.

Another way of looking at this list is that the more anal investment analysts can use this framework to cover all the bases when analysing the future prospects of the company. But if you resolve to analyse the company using this framework, at what point does an investor stop and conclude that data gathering has ended and a decision needs to be made ?

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