Balance Sheet Risk Management

From an accounting logic to a financial mastering of risks

All too often, the Finance Department does not become involved in risk management until it is too late. The department is then required to carry out an ex-post valuation of a provision for risk when closing the accounts or, worse still, when a financial loss is recognized.

Challenges

Risk is an inherent part of growth for companies. Chief Financial Officers (CFOs) must be able to measure risk in advance, have total control of its valuation, and ensure that learning and feedback processes are in place to improve risk management.

Their challenge is to know whether current financial performance accurately reflects the reality of operations and if it guarantees future performance level.

Chief Executive Officers (CEOs) also need to have an overview of the risks identified and their level of coverage.

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Other than accounting principles, securing performance depends on whether the potential risks underlying the activity are accounted for well in advance. Teams too often confine themselves to a static, ex-post approach to identifying provisions for risk.

Only a planned and dynamic industrial approach to accounting for risk from a financial point of view can enable a CFO to deem the measurement of performance correct at any given time.

This approach, known as balance sheet risk management, consists of identifying, valuing, and monitoring risk. We have identified two major stages in its implementation:

Designing the balance sheet risk management process and tool:

  • Defining a typology of risks inherent to the company's activity (project risk, recovery risk, customer-related legal/contractual risk, social risk, product quality risk, etc.)
  • Allocating each type of risk to a business function (Operations, Finance, HR, Supply Chain, Legal, etc.), which is then responsible for its management, with Finance remaining in charge of its valuation
  • Establishing valuation rules in line with the applicable accounting principles
  • Defining governance, including the balance sheet risk review
  • Designing the management tool for monitoring the identified risk throughout its life cycle (nature, allocation, valuation, root cause of risk, action plan to reduce or eliminate the risk, decision and valuation of cover, etc.)

Implementing balance sheet management can prove tedious, due to the number of stakeholders involved. The key success factors are:

  • Integrating the balance sheet risk management process into the Finance function procedure guide, to enshrine the approach
  • Heavily involving managers from the Finance function (CFO of the Business Unit, Operational Controlling, Central Controlling, etc.)
  • Ensuring the accountability of the functions involved, through appropriate change management
  • Encouraging regular reviews (e.g. quarterly) by executive management, to refine financial performance forecasts or implement corrective measures
  • Regularly auditing the process, to ensure the quality and uniformity of data
  • Sharing information with company auditors

 

How can Argon Consulting help you?

Argon Consulting's experience facilitates and accelerates the implementation of balance sheet risk management.