The Handbook of Global Corporate Treasury

Chapter Seventeen

Art and Science of Risk Management

THE JURY IS OUT AS to whether risk management is an art, a science, or a process. We consider it to be a way of life, and a combination of an art and a science. In this chapter we introduce risk as a concept, defining and going through various ways in which it can impact the firm by focusing on the financial risk elements that come under the treasurer’s purview.

KINDS OF RISK

There are different elements of risk that you should know about. Here we discuss various categorisations of risk and some important considerations for managing risk.

The risk that we will be focusing on is the uncertainty associated with the financial performance of the company. Before we go ahead, there are some simple points to remember about financial risk.

• Risk means uncertainty, not necessarily losses. We usually associate risk with losses. Risk, however, is actually uncertainty. Making profits that you do not expect is also a risk. Stakeholders would be wary of profits or gains not directly linked with an increase in the business and any windfalls that would be hard to repeat by design.

The uncertainty—and not the loss—impairs the ability to predict and to ensure, assuming business was operating normally, anything that impacts the certainty or stability of the financials, such as profit and loss, cash flows, balance sheet, and finally, profitability and financial performance.

In normal use, the term risk is associated with losses or a negative performance. ...