Risk Management

Risk management in most businesses is dependent on the mechanisms placed by the organizations to identify risks in good time, cushion the company, and employ protective measures, to limit the extent to which the risks might impact the growth of the organizations. Despite the steps that have been highlighted in principle and theory of how organizations can plan against risks, challenges still exist. It is never possible to identify all the risks that a company will face during its operations, and this is one of the realities that financial departments of companies often face (Garcia & Garcia, 2017). In financial institutions, for example, the establishment of risk management portfolios is not only to ensure a risk-free environment but to also plan for the remedial actions that the financial institution will have to take as it resumes normalcy after the effect of the risks. Businesses must understand some of the possible limitations that might exist in their risk management processes, as this will inform some of the remedies that they could propose as they restructure and strive to achieve normal operations (Fraser & Simkins, 2016). The subsequent sections of the paper discuss some of the challenges, either emerging or ongoing, that organizations must manage and mitigate against. One of the challenges is an economic slowdown and slow recovery. Within a financial year, several issues could lead to an economic downturn. Some of the factors that could lead to such a situation include the emergence of a pandemic that interrupts normal operations of the global economic environment, leading to the revision of financial projections on the gains or losses that a company might face (Khairi et al., 2018). The other issue that could lead to an economic slowdown is the existence of trade regulations, either because of one developed country revising its trade policies and seeking to renegotiate previous deals, or having an emerging market providing restrictions on entry into the market, creating a negative ripple effect to global business operations. Apart from the slowdown of an economy, there is also the projection that companies might make that the economy will rise steadily in its recovery process, only for the economy to have a slow process (Garcia & Garcia, 2017). This would negatively impact the financial risk management, as it is impossible to project the extent to which a company's finances would be affected. Given the unexpected nature of these changes to the economy, financial risk managers can sometimes not forecast their existence; hence it becomes a challenge in trying to establish mitigating mechanisms or manage the effects on a company. The other challenge that organizations and financial institutions face is the regulatory and legislative changes. This is often an issue for risk analysts where a legislative change unpredictably occurs. For instance, where a regional economic block such as the European Union, during a financial year, passes legislative changes that affect the way business within the Union operates, and how the Union will engage other economic blocks (Hofmann & Scordis, 2018). Such changes are sometimes unplanned for, and financial institutions will have to adjust accordingly, depending on the nature of the legislative change. This creates a challenge for financial risk managers as it is impossible to forecast when and how legislative processes of governing institutions of economic blocks will occur and the extent to which they could disrupt the usual functionalities of the market (Khairi et al., 2018). Even though some financial risk managers will have a plan to manage such occurrences, the extent to which they impact the market could still pose a challenge to an organization. Cyber risk is another emerging challenge for financial risk management. The dawn of technology brought with it some benefits to organizations, and most global business operations are presently having a significant proportion of their processes under automation (Fraser & Simkins, 2016). This means that the overreliance on technology is exponentially higher, and it increases every year as well as innovations in technology emerge (Garcia & Garcia, 2017). With the use of technology, comes the risk of cyberattacks. Cyberattacks can derail the functionality of an organization, and it is often impossible to quantify the extent to which they can impact an organization's operations. Some companies have functioning information technology departments that plan for and provide protection against cyber threats. Still, despite such measures, several financial institutions have reported the infiltration of their processes through cyberattacks (Khairi et al., 2018). Such attacks often impact a company's reputation, depending on the extent to which the infiltration compromised critical components of a company's operations. The net effect on the financial capabilities of a company can sometimes not be understood, and this poses a challenge to financial risk management of most companies. Failure to retain or attract top talent is also a challenge that companies face in financial risk management. The nature of the present global economic environment is that competition is often rife and is based on the ability to be innovative (Hofmann & Scordis, 2018). The extent to which businesses can innovate and produce products that increase the utility of products is dependent on the available talent in the organization. During a financial year, a competitor might introduce a new way of managing its internal affairs and minimizing its production costs (Garcia & Garcia, 2017). It will be the duty of the internal talent within the organization to counter such measures. Where a company is unable to retain or attract talent, it makes it difficult to achieve the projected financial benefits, and risk managers cannot manage or mitigate against such a risk. This is because it is never possible to predict the extent of the damage to the company and when the company might experience an impact on its financial objectives that emerges from the innovative efforts of its competitors. Lastly, financial risk management faces the risk of third-party liability. Consumer rights' laws have been broadened globally, and this has resulted in stricter liability for both service and product providers. Previously, the risk was mainly on companies that operate in developed countries, but this has expanded with the inception of globalization, making companies at higher risks, regardless of their point of operation (Khairi et al., 2018). Consequently, companies have seen an increase in the group or class actions that result in awarding of punitive damages by companies to the affected customers. This rise in compensation culture impacts the financial health of an organization, with some companies opting for a settlement process that limits the damage that a company can experience on its reputation (Hofmann & Scordis, 2018). Financial risk management can sometimes fail to predict the existence of a class lawsuit against a company, and the extent to which the lawsuit will impact the financial strength of a company (Garcia & Garcia, 2017). Given these limitations, the risk management of the increase in consumer rights' laws provides a new challenge that financial risk managers must deal with if they are to cushion their respective companies from risk exposure.