- Explain how accounting is tied to risk management planning
Every plan, strategy and decision made by any business involves a certain amount of risk. There are many risks faced by businesses and controls that can be put in place from an accounting perspective to minimize these risks. From a managerial accounting standpoint, companies use controls to reduce the risk that what they planned to happen during the budgeting and planning processes will not happen.
So what is a risk management plan?
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Let’s look at a couple of potential risks and how, from an accounting perspective, they might be controlled.
- Budgeting errors in the production requirements have created either excess or insufficient production
- Implement a rigorous review of the budgeting process, along with periodic reviews during the budget term
- Inaccurate reporting of the inventory valuation
- Perform periodic physical inventory counts and compare to the financial accounting records
What if you have budgeted a change from employing staff in your US facility to taking the production of your widgets overseas to save money? This may look like a good thing on paper, with a lowering of the cost of production, but what might be some issues with this change?
- The quality of your product may go down, causing more product returns.
- The lead time from order to production may be longer due to transit issues.
- Employment guidelines may be the same, or might they be employing children or asking employees to work long hours
- Company morale may go down due to this change
As a manager it is important to not just look at the numbers, but to look at the other factors that may change with a change in the budget. These changes may create additional risks that may reduce overall profitability.
These changes may also impact the image of the organization. Imagine if Trek suddenly moved their production overseas, resulting in a lower quality of bicycle, when they clearly state on their website that they build their bikes in the United States Might that create a decline in sales? Perhaps their retail outlets would decide to purchase bikes from other manufacturers? Maybe the employee morale of those still working in the United States would go down, creating lower quality of even the bikes still made here.
There are so many factors to consider when making accounting decisions that may not even relate money. As a manager, make sure to look at all of the potential risks involved in a decision, not just the immediate financial costs or savings.
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