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There\u2019s no way around it \u2014 owning and operating a business comes with risk. On the one hand, operating under excessive levels of risk will likely impair the value of a business, consume much of its working capital and could even lead to bankruptcy if those risks become all-consuming. But on the other hand, no business can operate risk-free. Those that try will inevitably miss out on growth opportunities and probably get surpassed by more ambitious competitors.<\/p>\n
How can you find the right balance? One way to manage your company\u2019s \u201crisk profile\u201d is to implement a formal enterprise risk management (ERM) program.<\/p>\n
Optimization, not elimination<\/strong><\/p>\n Most businesses have internal controls to prevent fraud, maintain compliance and reduce errors. But an ERM program goes much further. It\u2019s a top-down framework that starts at the C-suite and addresses risk at every level of the organization. An effective ERM program helps you and your leadership team not only identify major threats, but also devise feasible strategic, operational, reporting and compliance objectives.<\/p>\n Traditional risk management techniques, which are often informal and ad hoc, use a \u201csiloed\u201d approach. In other words, each department focuses on minimizing its own risks. The efficacy of this approach is limited at best, for a couple reasons. First, it fails to address how risks may arise in the way departments interact \u2014 or don\u2019t interact \u2014 with each other. Second, it often wrongly assumes that the goal of risk management is to eliminate<\/em> risk. In truth, the proper goal of risk management is to optimize<\/em> risk; that is, develop strategic objectives and operate the business under acceptable levels of inevitable risk.<\/p>\n An ERM program takes an integrated approach. It recognizes that many risks are enterprise-wide and interrelated. For example, say a business identifies a new vendor offering substantially reduced prices on key materials. From the accounting department\u2019s perspective, the deal may seem like a no-brainer. But an analysis under an ERM program could reveal that the vendor is situated in a high-risk area for natural disasters or civil unrest. Or the ERM analysis might show that the vendor is a bad match technologically or has poor cybersecurity.<\/p>\n Good starting point<\/strong><\/p>\n Naturally, every company\u2019s framework for an ERM program will differ depending on factors such as its size and structure. But one tool that\u2019s proven helpful to many businesses is the Committee of Sponsoring Organizations of the Treadway Commission\u2019s (COSO\u2019s) Enterprise Risk Management \u2014 Integrated Framework<\/em>, which was originally published in\u00a02004.<\/p>\n COSO is a joint initiative of five private sector organizations that develop frameworks and guidance on ERM, internal controls and fraud deterrence. The five organizations are the American Accounting Association, the American Institute of Certified Public Accountants, Financial Executives International, the Institute of Internal Auditors and the Institute of Management Accountants.<\/p>\n The original COSO framework covers four categories of objectives: strategic, operations, reporting and compliance. It also sets forth eight key components: 1)\u00a0internal environment, 2)\u00a0objective setting, 3)\u00a0event identification, 4)\u00a0risk assessment, 5)\u00a0risk response, 6)\u00a0control activities, 7)\u00a0information and communication, and 8)\u00a0monitoring. Note that, in 2017, COSO published an updated complementary publication entitled Enterprise Risk Management \u2014 Integrating with Strategy and Performance<\/em>.<\/p>\n Perfect framework<\/strong><\/p>\n Are you tired of putting out fires or having to rethink major strategic decisions because they\u2019re just a little bit off the mark? If so, a formal ERM program may be the solution you\u2019re looking for. We\u2019d be happy to help you build the perfect framework for your business.<\/p>\n \u00a9 2024<\/em><\/p>\n <\/body> There\u2019s no way around it \u2014 owning and operating a business comes with risk. On the one hand, operating under excessive levels of risk will likely impair the value of a business, consume much of its working capital and could even lead to bankruptcy if those risks become all-consuming. But on the other hand, no […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[8,11,12],"class_list":["post-16820","post","type-post","status-publish","format-standard","hentry","category-business","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16820","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=16820"}],"version-history":[{"count":1,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16820\/revisions"}],"predecessor-version":[{"id":16821,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16820\/revisions\/16821"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=16820"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=16820"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=16820"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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