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Principles of Business Introduction to Finance – seminar 8
Overview
2
• Financial risk management
An introduction to risk
Examples of types of risk:
3
• Business risk – The overall risk of something happening that would impact on the organisation’s overall objectives
• Financial risk – The risk of something happening that would impact on the organisation’s ability to present a true and fair view of it’s financial position
• Ethical risk – The risk of the organisation acting, or being seen to act, in an unethical manner.
• Reputational risk – The risk of something happening that could impact on the reputation of the organisation
Exercise 1
Examples of types of risk:
4
• Using a company that you are familiar with (please use Pearson if you would like), analyse the risks that organisation faces into the following categories:
- Business - Financial - Ethical - Reputational
Understanding risk
L1 Financial Frameworks 1 5
Overall risk for a board of directors
= IR x CR x DR
- If control risk is higher then detection risk should be lower (and vice versa)
Mitigating the risks that you have identified: internal controls
L1 Financial Frameworks 1 6
Examples of preventative controls
• Authorisation• Physical controls• Segregation of duties
Mitigating the risks that you have identified: internal controls
L1 Financial Frameworks 1 7
Examples of detection controls
• Reviews• Reporting• Audits (financial, internal, compliance, supplier)• Observation & Monitoring
Exercise 2
Control risk exercise:
8
1. What are the key risks that Ryanair face? 2. Design appropriate controls for the risks that you have identified.
Mitigating the risks that you have identified: internal controls
L1 Financial Frameworks 1 9
Ryanair
• a strong and independent Board which meets at least 4 times a year and has separate Chief Executive and Chairman roles;
• a clearly defined organisational structure along functional lines and a clear division of responsibility and authority
Mitigating the risks that you have identified: internal controls
L1 Financial Frameworks 1 10
Ryanair
• a comprehensive system of internal financial reporting which includes preparation of detailed monthly management accounts, providing key performance indicators
• quarterly reporting of the financial performance with a management discussion and analysis of results;
Mitigating the risks that you have identified: internal controls
L1 Financial Frameworks 1 11
Ryanair
• Weekly Management Committee meetings, comprising of heads of departments, to review the performance and activities of each department in the Company
• Detailed budgetary process which includes identifying risks and opportunities and which is ultimately approved at Board level;
Mitigating the risks that you have identified: internal controls
L1 Financial Frameworks 1 12
Ryanair• Board approved capital expenditure and Audit
Committee approved treasury policies which clearly define authorisation limits and procedures
• a risk management programme in place throughout the Company whereby executive management reviews and monitors the controls in place, both financial and non financial, to manage the risks facing the business.