Risk management is a discipline that ensures that a company is always looking at the downside risks of its business – the ongoing review of the threats, weighed against the business opportunities and growth. It is about fully understanding what could go wrong in all aspects of your business, estimating the risks and potential impact, and then changing the business if necessary, or implementing back up plan in case things do go wrong. Sort of like having an insurance policy – paying all of those premiums is expensive – until disaster happens and you are thankful you had a taken the time to recognize the risk and purchased a policy to cover off what could go wrong.
There are risks involved with running any business, and managing those risks is the responsibility of management. The last thing you want is for all your hard work to be in vain because you didn’t act upon a risk that could derail you. That risk could be in many different areas and often in areas you would least expect because you have been lulled into believing that smooth sailing will last forever. That is why it is so important to fully assess and understand risks, and that’s what an Enterprise Risk Management program will do if implemented properly.
The strengthening Canadian dollar has caught many people off guard – who knew that it would ramp up from 80 cents to par within a 2 year period? Not many people. But just because the Canadian dollar has been relatively stable for several years, did that mean the trend would continue? I worked for a company that had one manufacturing plant in Canada and one plant in the US. They both manufactured similar products. The obvious question was always – why not consolidate both plants into one plant where you could gain efficiencies? Here’s the reason it was not – operating both plants offered a hedge for any potential labour stoppage, provided competition between the 2 plants, and provided a “natural currency hedge” insofar as equal volumes of product were traded between Canada and the US. That was risk management at work. In light of the volatility of exchange rates, I am sure that company is happy that they paid a “risk premium” by operating both plants.
The point about risk management is to ingrain this notion of risk assessment throughout the organization, so that nothing, or very little comes as a surprise.
Edelkoort | Smethurst | Schein CPAs LLP is located in Burlington Ontario servicing the Golden Horseshoe and Greater Toronto Area and beyond. The firm is fully licensed with CPA Ontario to provide assurance, tax and accounting services as well as registered as tax preparers with the Canada Revenue Agency (CRA) & Internal Revenue Service (IRS). The firm is also registered as an IRS Certified Acceptance Agent.
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