Overview
The first step in enterprise risk management is risk identification. That is, the firm should brainstorm a list of the risk that it faces in order to create a framework for addressing those risks.
As a general rule, there is a list of risks that most firms face and can provide a basic outline of an individual firm's risks. However, the firm should strive to identify the risks that are unique to itself, and to provide a process for escalating risks as they are identified.
Operational Risk
One of the primary risks faced by all companies is operational risk. The following represent a common list of risks that are seen to fall under the operational risk category.
Modeling Operational Risk : Operational risks are notoriously hard to model. Nevertheless, there have been attempts to design some kind of framework around them.
Product Firm Risks
Product firms have a few primary risks that are common to most firms that produce or sell a product.
- Demand Risk - the risk that the demand for a firms product changes materially, such that the firm accrues inventory that it cannot sell.
- Supply Chain Risk - the risk that the firms that supply the inputs to the product being sold are unable to meet the needs (either in amount of product or timing) of the firm.
- Liquidity Risk : liquidity risk is the risk that the firm will face a payment due to a creditor, but have all its assets locked up in non-liquid assets.
Financial Firm Risks
- Liquidity Risk : liquidity risk is the risk that the firm will face a payment due to a creditor, but have all its assets locked up in non-liquid assets, ones that cannot typically be used to pay a debt.
- Market Risks
- Price Risk - firms that hold financial assets face the risk that the market price of any of assets can decline.
- Credit Risk - the risk that any of the obligors of a firms credit instruments could default.