Introduction to Financial

Management and Budgeting

FINANCIAL RISKS

©National School of Government

What is risk management? .......................................................................................................... 1

What are the benefits of risk management? ............................................................................. 1

When and how should risks be managed? ................................................................................ 2

When to manage financial risks ................................................................................................................. 2

How to manage financial risks ................................................................................................................... 2

What are typical categories of risk? ........................................................................................... 3

How can performance management contribute to risk mitigation? ...................................... 4

©National School of Government

What is risk management?

Risk management is essentially:

The on-going identification and evaluation of actual as well as potential risks as they
pertain to the specific institution in totality;
The assessment, identification and monitoring or elimination of actual and potential risks
that a specific department or institution may be faced in achieving its objectives;
The process of accepting, reducing, mitigating or eliminating risks by implementing new
or improved and appropriate internal controls that contribute to achieving objectives;
The process of determining how often a risk will happen and possible associated costs;
risks can be reduced by good controls or increased by poor controls; and
The risk management process entails the planning, arranging, and control of activities
and resources to minimise the impact of risks to levels that can be tolerated by
stakeholders.

Risk management is concerned with:

Establishing responsibility and accountability for critical institutional risks;

Identifying and assessing significant risks;
Aligning these risks to an institution’s strategy;
Designing and implementing processes by which these risks can be managed and
maintained at a level acceptable to management;
Eliminating management controls that no longer serve a risk control function and
merely stifle efficiency;
Identifying opportunities that may otherwise be overlooked, and considering
exploitation of opportunities previously considered too risky; and
Developing ongoing oversight and independent review of the risk management
process, including the effectiveness of internal control.

What are the benefits of risk management?

Risk management is proactive and anticipatory, enabling a particular department to

achieve its objectives with more certainty. It allows decision-makers to be predictive and
serves as a preventative measure.

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To be effective, risk management must be integrated with and supportive of
management processes. Effective risk management requires access to information that is
relevant, accurate, current, clear, and complete. Such information can alert
management to warning signals, which are then used to inform decision-making and
evaluate a department's operational health.

When and how should risks be managed?

The short answer is that risks should be managed all the time. Effective financial risk
management is an ongoing process that starts during budgeting, involves continuous
assessment, and requires proactive strategies to mitigate potential threats.

Below are some practical pointers on when and how to manage risks systematically with
the view to promote fiscal responsibility and effective resource allocation (adapted from
OpenAI ChatGPT, 2023).

When to manage financial risks

Financial risks in government departments must be managed systematically to ensure
fiscal responsibility and effective resource allocation. The process of managing financial
risks involves identifying, assessing, and mitigating potential threats to the financial stability
and integrity of the government department.

Budgeting process: Financial risk management begins with the budgeting process.
Departments must identify potential risks that could impact strategic goals and allocate
resources accordingly.
Regular assessments: Ongoing financial risk assessments should be conducted at
regular intervals, considering changes in economic conditions, fiscal policies,
regulations, legislative frameworks, and any other factors that may impact the financial
position of the department.
Project implementation: Financial risks to specific projects, such as cost overruns or
revenue shortfalls, must be identified and managed throughout a project's life cycle.

How to manage financial risks

Integration with governance frameworks and regular monitoring are important
components of a comprehensive approach to financial risk management.

Risk Identification: A comprehensive risk identification process entails recognising

potential financial threats, such as economic uncertainties, market fluctuations, and
project-specific risks.

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 Risk assessment: Once identified, risks should be assessed in terms of their impact and
likelihood. Prioritising risks helps in determining where to allocate resources for
mitigation.
Mitigation strategies: Departments must develop and implement effective mitigation
strategies for identified risks. This may include diversifying revenue streams, developing
contingency plans, or adjusting spending priorities.
Monitoring and reporting: Regular monitoring of financial performance and risk
indicators is essential. Departments should establish reporting mechanisms to keep
stakeholders up to date on the status of financial risks and the effectiveness of
mitigation measures.
Integration with governance frameworks: Financial risk management should be
integrated into the broader governance frameworks of departments. This includes
aligning risk management with strategic objectives and ensuring accountability at all
levels.
Capacity development: Ensuring that employees are properly trained in financial risk
management practices helps to make the department more resilient and adaptable.
This includes keeping up with industry best practices and incorporating lessons learned
from previous experiences.

What are typical categories of risk?

Organisational risks are not limited to financial risks, which are those that involve losing
financial resources or incurring unacceptable liabilities. There are other risks, including:

Strategic risk: Strategic risks are risks that relate to doing the wrong thing. For example,
taking on an operational activity that results in the emission of pollutants at legally
unacceptable levels would be a strategic risk.
Environmental risk: Environmental risks are usually determined by sources outside the
control of institutions. They are sometimes referred to as ‘external risks’ facing institutions.
An example of an environmental risk would be the possible occurrence of a natural
disaster and its impact on an institution’s operations.
Business risk: Business risk is the threat that an event or action will adversely affect an
institution’s ability to achieve its objectives and execute its strategies successfully.

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How can performance management contribute to risk
mitigation?

Performance management is a strategic management approach that provides

managers at various levels with a set of tools and techniques for regularly planning,
continuously monitoring, and periodically measuring and reviewing departmental
performance in terms of indicators and targets for efficiency, effectiveness, and impact.

Performance management can contribute to risk mitigation in several ways. For example,
regular performance assessments can help identify non-compliance with expected
performance standards. Early detection enables timely intervention before problems
escalate into significant risks.

Clear performance goals that are aligned with a department's strategic objectives can
help to focus efforts on risk mitigation priorities. Institutional performance should be linked
to individual performance management, and performance management should be
linked to performance improvement.

The core components of a risk management system should therefore include the
following:

Performance measurement;
Performance monitoring, reviewing and evaluation;
Performance auditing;
Performance reporting; and
Intervention.

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