For those who tend to see the glass as half empty, business risk may seem like a crisis lying in wait to undermine your organization’s hard-earned success. However, on the bright side, where there’s risk, there’s opportunity. The most successful businesses are those that identify and harness risk to achieve their goals.
From start-ups through multibillion-dollar enterprises, all organizations face risk, and the opportunities for risk to arise become only more apparent as your organization grows. Managing risk carefully is important to your organization’s immediate success as well as its longevity. Examining risk in your business processes and controls will help you address troublesome areas as well as uncover ways to gain efficiencies, integrate your processes with your long-term goals, and operate more effectively—all improvements that can help you gain an edge on your competition.
Let’s look at the three main categories for risk and where you can look for improvements in your own operations.
Improving your organization’s business processes is an opportunity to improve performance, and achieving lasting improvements and a competitive advantage requires ongoing risk management. Furthermore, market demands evolve, better technologies replace existing options, and your business needs change. As a result, ideal operations are a moving target—one well worth pursuing.
As an example, consider the ramifications of underutilized software investments. When your software isn’t used to process and track the information your people need to do their jobs well, you’ll see alternate processes cropping up across your operations, such as spreadsheets and data files that are manually manipulated and shared. You’ve invested a significant amount of capital in your software, so every time it’s not used, you’re paying for the manual workaround process as well. Furthermore, you open up the possibility of data and calculation errors or the failure to perform needed business functions properly and consistently. Ultimately, this results in a less-than-competitive cost structure and a lack of capability to address customer and business owner needs.
Well-designed, well-implemented processes provide business-critical information to each participant in your revenue stream so they’re aligned toward your ultimate goal and not duplicating efforts. Analyze where your organization’s operational risks lie by starting with these questions:
- What are we doing to address risks that have the greatest potential impact on business performance?
- Which practices don’t contribute to achievement of our business objectives and goals?
- Where have we complicated our business in ways that can be simplified?
- How can we remove the risk of failure from processes that work across our organization?
- Where are our manual processes and data transfers creating management information errors?
- What market-facing risks can we tackle better than our competitors?
In highly regulated industries, poor risk management can be catastrophic, since inadequate processes and controls can cut off your lifeline entirely.
Without processes in place to make sure every action by every employee supports your compliance efforts, you may find yourself in violation of legal requirements, severely damage your reputation, or violate agreements made with other organizations—all which could jeopardize your current financial stability and your ability to secure future work. Examples of organizations that face compliance risks include those that contract with the government, government entities, health care providers, organizations with public stakeholders, and any organization that impacts public health and safety. Health care providers, for example, must comply with ever-changing and more complex requirements that profoundly impact their financial stability and ability to fulfill their missions. Whether it’s a pricing policy, medical procedure coding, use of funds, or any other facet of health care service, noncompliance can have severe ramifications.
The government expects organizations to know what’s required of them. So regardless of whether government-regulated organizations violate requirements consciously or unconsciously, they can find themselves facing stiff penalties, revenue reductions and, in some cases, criminal charges. By developing a robust compliance program with appropriate segregation of duties, adequate and thorough records, and appropriate employee permissions, these organizations and others can reduce their risk of noncompliance while also adding value to the organization—and likely boosting its reputation in the marketplace.
As another example, take a highway contractor that has a history of providing disadvantaged business enterprise (DBE) credit for prime contractors. The DBE program is a lucrative one, and unfortunately, that also makes it a prime area for fraud. Contractors who can demonstrate solid internal controls for evaluating the DBE status of their subcontractors and reliably deliver DBE credits are in high demand across many regions of the United States. As a result, companies with robust DBE compliance programs typically win more bids for work and are often awarded much more competitive contracts.
Determine where your organization’s compliance risks lie by asking:
- What steps have we taken to address new and evolving compliance requirements?
- How do we know whether we’re complying with requirements that have a significant impact on our operational performance and reputation?
- What has our organization done to survey and prioritize our compliance risks?
- Do we put significant resources and effort into protecting ourselves from compliance risks?
- What have done to capitalize on compliance risks that we handle better than our competitors?
Financial Reporting Risk
Last and certainly not least, poor processes and controls bring financial reporting risk. Reporting incorrect or incomplete data will create negative perceptions and problems with your stakeholders and regulators—and you know well the consequences that can have. Furthermore, your organization could also be missing out on key insights its data should be providing.
For example, you may end up making poor financial decisions related to incorrect information, or you could end up in a situation where you’re losing assets without knowing it. Poor audit opinions will likely erode investor confidence, and your credibility as a management team may be called to question.
Instead, when you can rely on business process controls and underlying financial systems to provide better information, you gain a better understanding of your revenue and cost streams so you can improve operational performance. This visibility means you’re better able to deliver what matters to your customers.
Identify possible areas of financial reporting risk by asking yourself:
- What changes in our company could impact our financial reporting entities and processes?
- How do we know we’ve addressed key changes in financial reporting requirements?
- What accounts and financial reporting processes have the greatest risk probability and impact?
- Where does information handoff create the greatest risk to financial reporting accuracy?
- How do we know our financial reporting controls are operating effectively?
- Do our revenue streams and cost drivers provide the visibility needed for good management decisions?
- What financial reporting processes and reports are not adding value?
- What manual financial reporting processes can we automate?
- How do we know our financial reporting processes are addressing end-user needs?
Opportunity at Every Stage of Your Business Life Cycle
The nature and extent of your risk management needs and the potential impact of those risks will vary with your organization’s size and maturity. At each stage in your business’s life cycle, pay particular attention to the following areas:
- Start-up. Staff specialization will be a key hurdle at this stage, and resources will likely be tight. Unfamiliarity with business requirements, needed controls, regulatory requirements, operational needs, and compliance risks are all important considerations.
- Growing business. Companies at this stage are often pinched for resources yet scaling quickly—a combination that’s ripe for risk. Watch out for systems that don’t scale, inadequate depth of resources, absence of needed skills sets, and inadequate controls necessary to provide a foundation for your growth.
- Large business. Your business has many moving parts, which means it also has less room for error. At this phase, your business faces a wide array of unknowns you’ll need to be mindful of. Focus on helping each part of our organization move together efficiently and effectively toward your overall goals.
By isolating your most relevant risks and making a concerted effort to address them through carefully designed, thoroughly implemented processes and controls, you’ll be able to close gaps, improve performance, and align your functions and your mission—and that’s efficiency in the making.
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Risk is everywhere, and it’s those organizations that recognize it and approach it thoughtfully who stand to benefit, turning what was once a liability into a competitive advantage.
To learn more about how processes and controls can help you reduce risk and improve your operations, contact your Moss Adams professional.