HOW TO MANAGE RISK IN INTERNATIONAL FINANCIAL MANAGEMENT

International financial management is all about managing risk at the international level. Risk and business are like Siamese twins that are very difficult to separate. In as much as risks are difficult to separate from businesses, the adverse effects of such risks on our business can be reduced to the barest level. Risk, in the context of this article will be seen as a measure of variability, volatility or uncertainty of transactions, investments or portfolios of investments.

Financial management as a discipline has grown so wide and complex that traditional financial managers are left with no choice but to constantly be on the move to understand the complexity involved in the financial products that are constantly rolled out by financial engineers on a continuous basis, a good example is; securitisation.

Securitisation is a financial process of bringing different kinds of debts such as; credit cards debt, residential mortgages, auto loans, students loans or commercial mortgages debt obligations, converting such pool of loans into: bonds, collateralized debt obligations (CDOs), collateralised mortgage obligations (CMOs) or pass-through securities, and subsequently selling same to the market. A major problem with securitisation is that most of the contents of the package are toxic in nature and the fact that companies floating securities are the ones that pays the rating agencies to rate the products.

This article is written to discuss modern business risks as it pertains to businesses (both local and international) with more emphasis on the financial aspects of risk management. There are two kinds of risks that businesses struggle with, they are: business risk and financial risk, management of risk will be discussed under same headings.

BUSINESS RISKS

These are those unexpected outcomes of events resulting from a company’s routine activities that have inherent to the nature of the entity’s kind of business.

MANAGEMENT OF BUSINESS RISKS

The best way to manage business risk is to set up good internal control in your business to ensure that the objectives of the business are achieved. These risks can be classified into:

Human capital risks

The most common business risk that every company faces today is the risk of going bankrupt as a result of the employees’ actions. It has been established that the weakest link in any system of control in the human-link. A system is as secured as those that make it functional. In this case, part of the process of managing such risk will be to have good human resource management procedures in place. Good practice is to have sets of conduct that every worker must observe.

The availability of good corporate governance ensures that processes are not halted as a result of inefficiencies. Drop in the motivational level of market force of a company can significantly increase the business risk of reduced contribution that might ultimately lead to business failure. I feel sad whenever I see business mangers not realising the fact that their human capital is the most important form of asset that they have. A lot of critical comments have been made in this aspect with many people pointing accusing fingers on the inability of the government to make appropriate laws to ensure that corporations realise the importance their staff members.

Globalization has made it possible for workers to be employed from all over the world and this implied that a company can use the services of a company without knowing the employee. This is technically known as outsourcing- and there lies the risk that needs to be properly managed. There are processes that need to be followed in order to carry out a security check on prospective employees.

The process of security back ground check on people before employment varies from country to country but are fairly standardised in many countries. Agencies are used to verify the identity and integrity of potential employees. Make use of them, i will not be mentioning any of them here as it might be against their terms, just do a search engine search of the phrase ‘how to perform security check on employees’ and follow the instructions.

Environmental hazards

Businesses can reduce their chances of going bankrupt through having an eye on their environment. This is where many going concerns get it all wrong by thinking that the environment in which it operates does not have much to contribute to her survival. For example, allowing your workers to work in an unhealthy environment can lead to an outbreak of pandemic and instigation of legal actions. This also will dampen the morale of workers and finally may lead to serious drop in business activities.

Government regulation and policies

Substantial amounts of business risks can be reduced by any enterprise by simply observing the legal system for any changes and respond accordingly.

FINANCIAL RISKS

These are best described as the uncertainties that are associated with changes in such factors as interest rates, stock prices, exchange rate movements and commodity prices (including factors of production). In the traditional sense of financial management, financial risk is strongly linked to the capital structure of a firm, such view is narrow in nature will therefore not be followed in this article. An integrated approach to managing financial risk will be followed.

Managing foreign exchange exposures (risk)

Businesses are exposed to four broad kinds of situations that can lead to financial instability. This is technically referred to ‘exposures’, they are: Translation exposure, Transaction exposure, Operating exposure, Interest rate exposure. In order not to make this article so long, the above identified foreign exchange risk management techniques and other factors will be discussed in types of foreign exchange exposure.