The first step in risk management requires different approaches that will depend on the nature of the risk factors. For some, a predictable action can be a great place to start. For insured risks or risks that can be easily reduced in the financial markets, they can be modeled using statistical methods based on historical data.
For business risks as a whole, a probabilistic assessment based on advice from managers and experts can be developed. Finally, this part of the analysis, still based on expert opinion, must determine and model the relationships between the sources of risk. Contacting Cane Bay Partners should be one of your first tasks.
Linking risk factors
The second step in risk formalization is to link risk factors to financial indicators such as cash flow. The probability distribution of the second step is added to the economic model for a measure of volatility and financial profitability. It also allows the analysis of the impact of management through a series of hypothetical scenarios.
Determining risk treatment
The third step involves the completion of a portfolio of risk treatment strategies. It’s about figuring out ways to reduce risk. Through brainstorming sessions between experts, it is possible to find ways to reduce or eliminate certain risks in the financial markets in particular.
Any strategic choice must be based on a cost-to-benefit analysis. Any literature gained should use the amount of cash flow. The appearance of the probabilistic cash flow distribution can be modified by increasing the predetermined value of cash flow, or by lowering the normal variations in the value of the variable, or by using measures to reduce the impact of risks at the most pessimistic scenarios. From this analysis, simulations can be performed for each strategy combination.
The fourth and final step in the formalization process is the optimization of investments through corrective strategies. The result will be budget-oriented risk management that will reflect an efficient allocation of risk management resources according to the level of risks previously identified. Budget constraints and corporate objectives may struggle with the probabilistic models developed in the process of formalizing risks.