CEOs: Are You Sure You Know Your Financial Condition? Your Financial Statements Are Hiding Risk

 Companies that manage risk are safer and more secure, and their financial statements can be relied on. Companies that don't manage risk are vulnerable and their financials are misleading.

You, as CEO, owe it to yourself to know if your financials are misleading. Your lenders will also be very interested, as well.

You're showing assets on your balance sheet and the silent promise is that those assets will continue to be there even following a disaster. Also liabilities are shown and, subject to uncontrollable events, those liabilities should not dramatically, suddenly increase, or at least that is the wish of those reviewing your financial statements, and it is your wish as CEO as well. There is no assurance achieved by the audit process that either of these conditions are the case. In fact, companies that do not manage risk may look more profitable in the very short run, because they have reduced short run expenses by ignoring risk management.

Here's a way to conceptually quantify what we're talking about:

RISK CAPITAL

A firm needs capital to finance its daily operations -- to cover payroll, rent, materials and all the other corporate activities. Call this Operational Capital. This is measured by traditional financial statements.

A firm also needs capital to finance risk -- to pay for things that unexpectedly go wrong like fire, flood and lawsuits. This is called Risk Capital, and is not measured by traditional financial statements. If you have any questions concerning where and how to use scott levy fuel online, you can make contact with us at our site.

There are three sources of risk capital:

Cash that the firm has on hand. To be sufficient, it would have to be an awfully significant amount, and it would probably not survive because of competing demands for its use.