How to Manage Strategic Risk in Corporate Finance
SRM (Strategic Risk Management) is the term given to a company's business forecasting function. By looking at trends, managers can use external events to help predict demand and the company's ability to respond to that demand. SRM can be measured by industry, technology, brand, competition, customer and type of project. SRM can be used for strategic planning, risk mitigation, crisis management and capital allocation.
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Instructions
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1
Assess your risks. In order to manage strategic risk in the corporate finance world, you must first identify your risks, the likelihood that their effects will materialize and when those effects may show up.
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Create a risk map, which categorizes your risk into groups that are in line with your operations. You can use risk categories such as industry, technology, brand, etc., or you can make your own. The risk map should be a visual description of Step 1.
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3
Measure the risk. In order to manage something, you must first know how to measure it. Quantifying your risk categories by currency or percentage is the most common approach.
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4
Develop an action plan for a positive scenario. Based on the risks and measurements identified, develop a list of scenarios that result in a positive impact on the corporation. What risks can the firm turn into an opportunity for increased sales?
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Develop an action plan for a negative scenario. Repeat Step 4 except you are developing a response to a negative situation. A credit crunch in the market or an industry downturn are two examples.
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Adjust capital allocation. The primary reason for SRM is to manage capital risk. Creating and using risk metrics for corporate finance should create a need to re-evaluate corporate allocation of resources (cash, assets, investments). Perhaps one product class or marketing strategy poses less risk than another.
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