Risk management stands as a key strategic oversight, essential for safeguarding the company's future, even with start-ups and scale-ups, and this can't be ignored.

The role of the Chief Financial Officer (CFO) is pivotal, looking beyond financial ownership and to include a comprehensive risk management framework.

Below we'll look at the multifaceted risks that finance leaders must review and outline a risk management framework to help manage these risks effectively.

Liquidity Risk: The first risk is the most obvious, and one that you're already looking at quite regularly, especially within a start-up. 

In the UK, 20% of new businesses go bankrupt after one year, and a huge 60% in the first three years.

There are a few key reasons for that statistic and one of them is running out of cash. Cashflow and liquidity risk is what a finance leader should be reviewing every single week. It should also be discussed with the founder and the leadership team on a regular basis.

Whether that is reviewing the road to break, when the business may run out of cash and may need to think about fundraising, equity or debt, looking at ways that revenue can be increased, and expenses can be decreased. Also reviewing working capital, how can you get your revenue into your bank account faster? And how can you delay the payment of expenses?

Debt Risk: For businesses that leverage debt financing, managing debt risk is crucial. Not only are the repayments a factor (overlapping liquidity risk), this also includes adhering to loan covenants to avoid contract agreement breaches and monitoring interest rate changes that may impact repayment terms and amounts.

Compliance Risk: Regulatory compliance is a significant area under the CFO’s role and responsibilities and potentially one you're very familiar with. This area is to ensure the timely and accurate filings of financial statements and tax returns. Not only in the country that you work in, but a CFO should understand the regulatory requirements in all jurisdictions that the group is located or operating in.  

For FinTech startups, which often operate under stricter regulatory environments (such as the FCA in the UK), compliance extends to both financial and operational activities, requiring a good understanding of regulatory frameworks by the CFO.

Process and Operational Risk: While not always directly involved in daily operations, the CFO can influence process decisions, which can have substantial risk implications. Opting for one process over another should include a thorough risk assessment to prevent operational disruptions.

Personnel Risk: Employees in general carry their own set of risks, but this is exacerbated when going through an extreme process, such as a redundancy process.  In 2023, and still in 2024, redundancies are relatively commonplace. There are lots of risks to consider when going through a redundancy process. Ensuring that the business remains compliant to all of these requirements.

Supply chain and key supplier risks: Who are your key suppliers, who is the business heavily reliant on in order to run the business or provide customers with the services that they require? Ideally, a Finance leaders should have those conversations with the business partners around the business to identify these risks and also understand how to mitigate against those risks, particularly with key suppliers.  If the business is so heavily reliant on one key key supplier, is there a way of looking for alternatives and having conversations with those alternatives so that the business can have multiple suppliers that can be utilised. 

Security and cyber risk:  Cyber risks are a huge risks for not just online businesses, but all businesses and the CFO generally will need to ensure that there are insurances in place. GDPR in Europe and data breaches can ruin a business and also its reputation.  A Finance leader should encourage that all leaders (particularly in Commercial teams and the CTO) that processes are as tight as possible to stop any cyber attacks or GDPR breaches.  This is much better course of action, then having a cyber attack and relying on insurance.  Insurance is a Plan B.  Plan A should be to block all of those gaps and protect the business.

External and macro risks: . External risks such as political changes (Brexit anyone?) or global pandemics like COVID-19 are unpredictable.

The best course of action, in preparing for a macro event is a Business Continuity plan. Once a year, review with all leaders in the business - if, for example, the business had to shut down for five days, what would the business do? What would the business need in order to continue operations?   This ensures the business can continue operations under various scenarios, minimising potential disruptions.

Implementing a Risk Management Framework

A proactive approach to risk management involves the development of a comprehensive risk management framework.  Many ideas or suggestions have been included in the identification of the risks above, however a high level framework coul include:

Risk Identification: Systematically identifying risks across all areas of the business.  Here a Finance leader could lead on these conversations, but ensuring that all parts of the business are covered and all leaders contribute.

Risk Assessment: Evaluating the likelihood and potential impact of identified risks.  Is this risk high or low and then what would be the impact if it did happen.  You can use a traffic light system or give it a grade out of 5.

Risk Mitigation: Developing strategies to mitigate risks through controls, insurance, and operational adjustments.  Here all leaders should be heavily involved and often there are actions each department needs to take to implement these mitigation ideas.

Monitoring and Reporting: Continuously monitoring the risk environment and reporting to the board and stakeholders.  

Continuous Improvement: Regularly reviewing and improving the risk management processes to adapt to new challenges and opportunities.  Ideally, the Risk Management Framework could form part of another annual / bi-annual process so that it isn't forgotten.  The budgeting & forecasting process, for example. 

Want to fast-track your finance career growth?  Check out the steps in our Framework below to get started:

1. Work with me in the Financial Leadership Foundations course  that includes monthly Q&A sessions where we can discuss all of your questions and how to apply your learnings to your current role. 
2. Download the Upgrade your Management accounts course to showcase your skills as a finance leader to the Founder, leadership team and the Board.