5 Critical Risks for Finance Teams and Financial Institutions
Risk is widely understood as one of the key components of finance. While modern financial theory states that higher risk is associated with a higher potential return, reckless assumption of risk without properly aligning internal operations could also create a bevy of issues for your organization. Recent 2023 news stories have been rife with financial missteps and exposure due to economic factors and the detrimental results that followed.
While risk is uncertain by nature, responsible organizations should at least prepare themselves for difficulties that other companies have commonly faced in the past. In order to avoid such catastrophic failure and continue stable operations long into the future, it’s vital that companies accurately monitor and control for a number of possible risks for finance teams.
Here is a list of five of the most significant risks for finance teams to handle through the implementation of effective risk management strategies.
1. Bankruptcy or foreclosure
The first risk for finance teams is bankruptcy, which occurs when an organization doesn’t have adequate cash flow to continue operations. Stories like the downfall of Enron in 2001 or the Lehman collapse of 2008 may dominate news headlines, but bankruptcy is far more common than you might expect, and it’s a major risk for finance teams to consider.
More recently, news of three US banks foreclosing within six weeks has been pushed to the forefront. This came as a surprise to many, considering that the end of 2022 saw a continuation of the downward trend in bankruptcy filings. In total, 33,481 US businesses filed for bankruptcy in 2022, which is six percent less than in 2021.
2. Equity market downturn impacts to finance teams
Market downturns can have a significant impact on a company’s ability to access capital and maintain successful operations. The 2008 financial crisis and the global stock market crash in 2022 (triggered by the Covid-19 pandemic) are prime examples of how market downturns can lead to bankruptcy, as companies struggle to raise capital and cover losses.
Thornburg Mortgage is another example of how market downturns can impact a company’s financial health. The company faced significant losses following the collapse of the housing market, which triggered margin calls. Due to the downturn in the equity market, the company was unable to raise the necessary capital and was forced to file for bankruptcy.
To manage this risk for finance teams and their companies, you need robust risk management strategies in place. This includes monitoring market conditions, diversifying portfolios, and maintaining adequate cash reserves to weather market downturns.
3. Schedule and resource contingency
Schedule contingency is important when planning for projects on fixed schedules. If tasks are defined and allocated in the necessary amount of time to complete a project, it will be difficult to adjust for obstacles or delays as they arise. Not to mention the fact that it’s virtually impossible to know exactly how long a specific component of a longer-term project will take.
Resource contingency involves setting aside extra money in an operational budget as a buffer to cover unexpected costs that may arise. Contingency rates of five-to-ten percent of an overall budget are common, but it’s up to each company to decide this for themselves. In any case, the risk for finance teams comes from facing unfinished tasks with a fully drained budget, creating a problem for any organization, big or small.
A company that does not effectively implement contingencies may suffer from a lack of available options when problems do occur down the line. To avoid this, it pays to consider any potential complications and necessary project buffers well in advance.
4. Financial risks of project overspending
Another risk for finance teams is effectively managing funds, which is critical for any project, especially when it comes to the risks for finance teams to mitigate. Overspending can lead to financial risks that can impact a business’ ongoing operations. Companies must ensure that they effectively employ their funding to see a project through to completion.
When projects go over budget, it can cause a delay in completion or even lead to outright cancellation. This is particularly relevant in the software industry, where many development projects have been canceled due to overspending. However, going over budget can also severely impact the ongoing operations of a small or medium-sized business. Local construction companies or other service providers, for example, must stay within budget to satisfy developers and earn continued contracts in the future. Failure to stay within budget can negatively impact an organization’s reputation and lead to missed opportunities in the future.
Finance teams play a vital role in overseeing project budgets and ensuring that funds are allocated efficiently. They need to monitor spending closely and implement cost-saving measures wherever possible. This includes negotiating with vendors for better pricing, streamlining processes, and minimizing waste. It’s still important, however, to consider the risks for finance teams, who must stay vigilant and implement cost-saving measures to avoid going over budget and to stay one step ahead and ensure that projects are completed successfully.
5. Financial reconciliation
Having two sets of accounts match during the accounting process of reconciliation is critical for any finance team. Without an effective system for recording and tracking transactions, companies risk being unable to monitor, manage, or settle business transactions.
Regular balancing helps detect any unusual transactions resulting from errors or fraud. For publicly listed companies, detailed financial reconciliation is especially important as small, unnoticed discrepancies could lead to significant inaccuracies when reporting quarterly financial information.
Effective financial reconciliation is an essential function that reduces risks for finance teams, including financial errors, fraud, and inaccuracies that can cause long-term damage to a company’s reputation and financial health. Implementing best practices through effective risk management strategies can help mitigate the risks for finance teams from financial reconciliation in several ways.
By implementing robust risk management policies, companies can better monitor and track financial transactions, making it easier to detect and prevent errors or fraudulent activity. Additionally, by regularly balancing accounts, companies can ensure that their books are accurate, reducing the risk of misreported financial information that could lead to negative consequences such as fines, legal action, or reputational damage.
Mitigate the risk for finance teams with Resolver’s risk management platform
While this list contains only five of the top risks for finance teams, there are an unlimited number of ways in which uncertainty can manifest itself and sideline the business ambitions of the unprepared. If nothing else, the risks detailed above demonstrate why instituting risk management for finance teams in your own company is so necessary.
Effective risk management is crucial for finance teams to proactively identify, assess, and mitigate potential risks that could negatively impact their organization’s financial health. By implementing robust risk management practices and tools, finance teams can identify and prioritize risks, develop mitigation strategies, and monitor progress toward reducing risk exposure.
One of the key benefits of risk management solutions is the ability to provide a holistic view of risks across the organization, enabling finance teams to make informed decisions based on real-time data and insights. Additionally, risk management tools can help to streamline processes, improve operational efficiency, and reduce the likelihood of financial losses due to unforeseen events.
Whether you’re managing financial reconciliation, project overspending, or other risks facing finance teams, implementing a risk management solution can help to reduce risk exposure and ensure the long-term financial health of your organization. Book a demo or watch a short, guided video to see our risk management software in action and learn more about how Resolver can help mitigate risks for your finance team.