As a business grows, its risk profile changes subtly. It is critical that all significant executives understand what your risk profile looks like at every point in order to be able to manage it. Disaster awaits companies that neglect this: just look at
Identifying risks before they arise
The truth is that 'risk' can cover many things – reputational risk, IT security risk, financial risk, credit risk, intellectual property risk, foreign currency risk. Some types of risk are common to all businesses and some are specific to the Islamic finance sector.
Taking a proactive approach to risk management is the only way to avoid potential disasters before they hit.
Creating an action plan you can reply on
A risk management plan should cover both financial and non-financial areas but clearly in an Islamic finance business, the financial aspects will be paramount.
Financial risk management can range from capital adequacy risk and
Non-financial risk might relate to regulatory and legal issues, human resources, codes of practice and employee conduct.
Preventing and managing foreseeable risk
The first step is identifying foreseeable risks. These will apply directly to revenue or cost lines in your budget. The easiest way to prepare for these is to go through your business forecasts line by line and ask yourself a series of 'what if' questions. This will give you a sense of how exposed to risk your organisation is and in which areas – and what you can do to mitigate it.
* What would happen if the price of components went up by 20 per cent?
* What would happen if rents in your area went up dramatically?
* What would happen if your top sales person left or stopped performing?
Nine times out of 10 there are strategies you can put in place to make sure that you minimize the downside or such events. These might include negotiating long-term purchasing guarantees with fixed prices, making sure you have a fixed rate long-term lease on your HQ and making sure senior staff have a long notice period (and a longer 'non-compete' clause).
Manage your risk before it manages you
Understand how your risk profile changes as you grow and make sure you stay on top of it. Great businesses cope with risks and minimize the downside. They don't have a crystal ball - just crucial lessons learned the hard way.
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