Understanding the risk associated with the company’s operations is the basis for managing the range of plan’s deviations in order to strengthen the creation of value added. The adjustment of management controls by risk component must ensure that the value of the company and its financial rating are increased and the unintended spending of funds is avoided. Decision options should be evaluated based on risk-return assessment supported by risk management tools: development of traditional measures by risk analysis with decision templates and risk-oriented training for controllers and managers. The insufficient integration of the risk issues and management control results from:
● the lack of risk targets in the performance measurement and incentive system,
● the lack of risk consideration in the value-based results assessment,
● the lack of technical and methodological skills in risk analysis among controllers and decision makers.
Practice indicates that the areas of management control and risk management operate independently in many companies, not only due to the lack of resources, but also due to the lack of awareness concerning the need to integrate information from the risk area with decision-making and performance assessment.
The coherence of the management process is ensured by systematic consolidation of all factors influencing the enterprise profits and taking them into account in the performance measurement. Management supported by state of the art management control developed by a risk component, becomes more comprehensive and effective. The impact of risk on company’s operations should be considered during budgeting, capital allocation and measuring business results. It is essential in order to achieve this aim to use risk analyses, designing an efficient risk reaction and measuring the risk-return profile. Therefore, the area of management control should be developed by risk controlling, responsible for controlling risk-taking and noticing managers concerning the impact of risk on results of activity. Hence, risk controlling naturally becomes a complementary area to the traditionally perceived controlling. Risk controlling should be defined as a management method focused on controlling the risk-taking by company managers towards stabilization of the economic results improvement (both by taking advantage of the opportunities and by neutralizing the undesirable consequences of risk exposure). The main task of risk controlling is to stop to perceive risk only as a negative situation and to start to manage the effectiveness of risk-taking, including all factors that may lead to both losses and profitability increase. This requirement determines the target risk controlling structure.
Risk controlling consists of the following elements:
● capital adequacy and correct allocation of risk capital to individual responsibility centers, which in practice is transformed into risk limits recommendations;
● risk monitoring and control of risk exposure, which should be linked to the guidelines for achieving the required risk-return profile;
● risk adjusted performance measurement.
Market opportunities are inextricably linked to risk-taking. An efficiently designed risk controlling should be enabled to take advantage of opportunities, creating conditions for generating stable economic profits. This can be achieved only, if the strategy implemented in the organization ensures an optimal balance between the goals of growth and profitability and the associated risks. Management control should secure compliance of the projection of management results and the applied risk control policies with the volatility of the factors influencing the company's success. Risk controlling should participate in defining the risk tolerance, risk limits, accepted risk reaction instruments and reporting channels.
- Top management receives the necessary information about the risk exposure and potential impact of risk on the results of company operations.
- Managers are informed about the expectations concerning risk taking and noticed concerning the impact of their decisions on the execution of plans.
The foundation for the development of management control is constantly controlling the impact of risk on the profitability of the company. Addition of risk impact to performance measurement allows to rationalize decisions also in the area of risk taking.
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