The Role of Risk Management in Company Evaluation
Duamentes experts shares the impact of risk management on company evaluation, stating it directly influences various aspects of a company’s performance, resilience, and long-term viability. When companies prove they can handle risks effectively, it makes potential investors feel more secure and interested, improve financial performance, and mitigate potential losses, thereby positively influencing the company’s valuation and overall reputation in the market.
Besides, it enhances decision-making, reduces negative events, and increases reliability and resilience. It encourages openness and responsibility within the company, building trust among stakeholders and making the company more sustainable in the long run.
For companies, two essential aspects involve expertly identifying risks and maintaining a consistent set of risk management activities. Neglecting either of these areas can significantly impair overall business operations and evaluation. For instance, it can erode stakeholder trust, attract regulatory attention, and weaken competitiveness, all affecting evaluation negatively. How to avoid it?
Duementes experts states, that different contexts present various types of risks, spanning financial, project management, health, and more. Identifying these risks is crucial for effective company evaluation.
Financial Risks
Market, credit, and liquidity risks are fundamental aspects of financial evaluation. For example, an e-commerce startup may face liquidity and credit challenges, affecting access to capital and cash flow. Investors seek details on how these risks are managed, such as through alternative financing and strong credit management practices.
Project Management Risks
Scope creep, resource shortages, and technical challenges are key in project management evaluation. For instance, a franchise coffee shop’s expansion plans may require additional resources and time. Investors look for clear agreements, comprehensive support for franchisees, and stringent quality control measures.
Health Risks
Biological and environmental factors, especially post-COVID-19, are critical. Investors evaluate companies’ measures to prevent disease spread and promote employee wellness.
Legal and Regulatory Risks
Compliance and litigation risks are crucial for startups operating across regions. Companies must ensure adherence to local laws and regulations and stay informed about changes.
Operational Risks
Adapting to new markets and supply chain disruptions are common challenges. Investors seek contingency plans and adaptability in the face of uncertainties.
Addressing human risks and integrating non-financial factors like environmental impact and governance practices are vital for a comprehensive risk management framework. Companies that prioritize these factors are seen more favorably by investors.
Ksenia Sternina, Managing Partner at Duamentes, shares additional activities within the risk management process to establish a complete plan and showcase how risks will be managed by company wherever they appear:
Data-Driven Risk Analytics
It involves using data to comprehend and evaluate risks through actions with a map of relevant data sources, data patterns, and a potential impact of identified risks on the business. By getting informed predictions, investors gain insight into a company’s business potential and company evaluation. One of our clients, a pharmaceutical company, before launching a new product in Germany successfully addressed data-driven risk analytics with regulatory approval timelines, anticipating potential side effects, and assessing market entry.
Scenario Planning and Simulation
It involves creating hypothetical scenarios, such as market shifts, technological disruptions, regulatory changes, natural disasters, or unexpected competitor actions to showcase that company is prepared for potential risks. As one recent example, a tech startup developing a new mobile app for ridesharing used scenario planning to anticipate regulatory changes with research on potential regulatory shifts, engaging with industry experts and policymakers to gain insights, and developing contingency plans to demonstrate to investor, that company is ready to adapt the business model accordingly.
Dynamic Risk Management Frameworks
The most common practices include flexible strategies that can adapt to changing risks, such as emerging market trends, socio-economic shifts, geopolitical tensions, and organizational restructuring. This showcases a company’s ability to revise its plans and tactics according to the risk landscape and affects business evaluation. For example, our client operating in countries with a low diversity index, created an inclusive onboarding design to mitigate risks arising from new regulations in some countries. Securing brand reputation from communicational crises, the company protected its evaluation level, maintaining a positive public image and fostering trust among stakeholders.
Collaborative Risk Ecosystems
This approach fosters teamwork across departments and stakeholders to identify and address risks collaboratively. For instance, a medical lab with a digital product utilized the COSO ERM (Committee of Sponsoring Organizations of the Treadway Commission Enterprise Risk Management) framework to identify and mitigate patient safety risks. Involving clinicians, administrators, and risk management professionals in decision-making processes, successfully reduced medical errors, enhanced patient care outcomes, and positively influenced the overall company assessment.
Behavioral Risk Management
It integrates an understanding of human behavior into risk management strategies, incorporating insights from psychology and behavioral economics to address human factors that influence risk outcomes within organizations, including cognitive biases, decision-making heuristics, social dynamics, and individual attitudes towards risk. As an example, a bank implements training programs to reduce the risk of clients falling victim to phishing scams. This proactive approach not only enhances security measures but also positively impacts company evaluation by demonstrating a commitment to protecting clients and mitigating potential risks.
Risk management integrates diverse components, customized to suit regional and industry nuances, but it must seamlessly align with company policies and operations. By integrating risk management monitoring and conducting regular reviews, companies can achieve higher evaluations and drive growth effectively.
