The AMA Handbook of Financial Risk Management

The AMA Handbook of Financial Risk Management

The AMA Handbook of Financial Risk Management

The AMA Handbook of Financial Risk Management

Synopsis

Business Insurance Magazine Innovation Award 2012 American Library Association Outstanding Business Reference Source 2012 Managing financial risk boils down to understanding how to reduce a complex business environment into workable concepts and models. The AMA Handbook of Financial Risk Management provides readers with the tools they need for dealing with the most important areas of financial decision making. Filled with strategies, principles, and measurement techniques, the book shows readers how to: - Categorize financial risks - Reduce risks from cash flow and budget exposures - Analyze operating risks - Understand the interrelationship of risk and return - Manage risks in capital investment decisions - Determine the value of common stock - Optimize debt in the capital structure Providing both explanations and practical applications, the book clarifies the key decision areas in financial risk management. This indispensable guide enables anyone involved in the financial management of an organization to know what factors are at stake and how to protect the bottom line.

Excerpt

Managing financial risks is all about understanding how to reduce a complex business environment to workable concepts and models. Everything starts with risk. If the risk from a business operation is not acceptable, the analyst does not have to know financial management. But how do you know whether the risk is acceptable if you do not gather a few facts, make a few assumptions, and run some numbers that will give you a picture of risk and return?

The AMA Handbook of Financial Risk Management provides the tools for dealing with what are arguably the most important areas of financial decision making. In a broad risk management framework, every decision involves an exposure and an opportunity. This is a lesson from the emerging concept of enterprise risk management. Further, it is a lesson that is fully integrated into this handbook. Yes, we can lose money with every financial decision. We also can pursue success at higher levels than the present.

What are the areas that should receive attention? We can start by categorizing risks. The firm is producing goods or providing services, usually both. If it loses its edge in design or creation, problems arise. Customers must be found or created. Products must be part of extensive distribution systems involving both suppliers of components and the markets for the products. The firm needs adequate capital to maintain its asset base and conduct operations. It must comply with laws, regulations, and directives. It must be prepared for disruptions and changing conditions and have funds for contingencies. All of these factors require the firm to understand its exposures and opportunities and the relationships among them.

Once we have the big picture, we can build models for managing financial risks. We start with balance sheets, income statements, cash flow statements, and other organized accounting information. We build budgets with an eye to the future and to changing conditions that may cause the future to be different, many times quite different, from the past or the present. In profit planning, we establish goals, build measurement tools, and seek ways to achieve leverage that increases the success of operations. These are the day-to-day and year-to-year processes to establish long-term stability for the firm and its business units.

A quite separate set of financial risks arises when the firm must deal with the financing of assets. The first step here is to recognize that money has a time value. When the firm borrows, the meter of interest starts to run. When a firm considers a new operation, it is proposing to tie up capital that could be productive elsewhere. How much should be borrowed? How risky is it to tie up funds?

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