Bancorp Treasury Services Limited

Make Risk Count.

FINANCIAL SILOS PUT BUSINESSES AT RISK

03 July 2010

Senior Client Advisor Peter Cavanaugh says too many enterprises are creating a ticking financial time bomb by failing to encourage all parts of the organisation to take ownership of financial risk.

�A holistic approach is needed whereby the finance team encourages everyone in the organisation to be aware of their own contribution to this risk, and to actively take responsibility for identifying, assessing, managing and reporting it.

“This is particularly true of ‘risk creators’ such as salespeople, marketers and buyers, whose roles are all directly involved in profit generation, and whose decisions and actions have a direct impact on the bottom line.�

Mr Cavanaugh notes that all too often these functions have little interaction with the finance team beyond routine financial reporting.

“Silos can be suicidal for a business and a prevailing ‘not my problem’ attitude to financial risk can become everybody’s problem,� he says.

Although issues such as cash flow and earnings are obvious financial risk areas to consider, all parts of the organisation should also think about wider risk factors that can damage relationships with customers, suppliers and funders, such as the potential reputational impact if the business stumbles financially.

Financial silos can be broken down by fostering a sense of ownership throughout the organisation and putting systems in place to facilitate a free, open and honest communication flow between the board of directors, executive team, finance team and risk creators. The result will be quicker, more accurate and more meaningful data flowing between all parties.

It is also important to increase the internal profiles of the business’s risk management and finance teams, and to ensure risk creators base decisions on a sound understanding of the risk and treasury framework.

Mr Cavanaugh says that, while it is vital to get communication flowing within an organisation, there should also be good communication with external parties such as customers, suppliers and funding providers.

Taking a ‘no surprises’ approach will help strengthen external relationships and create financial stability. For example, openness about how exchange rates influence product pricing helps customers to better understand and accept the business’s decisions. Mr Cavanaugh says that putting systems in place to open up financial silos takes a degree of effort and commitment, but will ultimately pay dividends.

“Many choose to do nothing because that seems to be the easiest path, but such indecision can also be fatal – particularly in this uncertain economic climate.

“Rapid and decisive response to early warning signs can make or break a business. Those surviving and even prospering in the recession will have robust processes in place. They will find that regular, transparent and meaningful financial communication and common ownership of financial risks provide a strong first line of defence,� he says.

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