Exposure Risks

In this turbulent time of exceptional falling down stock markets the whole world is wondering how this could have happened.

Every (financial) subject is already connected to the financial crisis, like the subprime markets, bonuses of bank officers, the trust of banks, the bank crisis of 1929 and today I heared a documentary on the radio which links the financial crisis to the behavior of animals in their animals kingdom and a couple of eminent people carry capitalism to the grave.

The rational causes behind the whole crisis are a little bit unlighted and sometimes even ignored by the media. In this article a closer look on one of the fundamental causes of the crisis: "hidden risks". But first something to laugh in this dark times….



Present Information

Dutch financial Minister Bos said: “The type of information could be better” and “Some posts on the balance sheet were ......... unclear”.

What can we learn of those statements? Why was the market governance not capable to prevent this crash? Why do we exactly collect this information and present it in the way we do?

The world of Corporate Performance Management covers the subject. Never the less it’s often common in our field that we have to deal “how to collect the right information” instead of “what information is right to present”. Sometimes that means that our job is to build in the exact way the reports existing for over twenty years including the formatting, the centre outlining and of course the scaling of the figures.
Maybe it’s a logic result of the fact that we don’t know the requirements of the decisions makers (and their unwillingness to change). The main issue about presenting information in exactly the same way over decades is that developments in the world are not represented by the figures.

Therefore a three steps to present forecast information which is still measurable:

1. Show the Risks.
2. Develop risk scenarios.
3. Classify risks in key-figures/indexes.

Show the Risks
The current financial statements show what happens in the past. Figures of last year are compared with a year before and with a little bit of luck a graph has been added.
It doesn’t explain what it means for the risks the company faces tomorrow. A lot of balance accounts and contingencies carry risks for the near future. You can make this visible by adding the follow items with additional exposures (information) on the balance sheet.










The risks to be measured depends of course on the kind of company.

Develop Risk scenarios
Risk scenarios are the second step to exposure risks. A simple variance analysis like the impact of 10% difference on the dollar exchange rate last year results in a higher/lower income of EUR 1.2 million (incl. translation differences).
This same analysis can be drawn up for all key environment variables, like interest rates, valuate, cost of raw materials (including oil, energy-rates, building materials), house markets and voluntary in the market of turnover (quantity and prices).

Classifies Risks in key-figures and indexes
Maybe it interest some analysts when this risks are included in the annual and Q- reports, although that’s doesn’t automatically influence the people from the street (normal stakeholder) in their behavior on the financial markets. Therefore it’s handsome to translate it in key-figures or indexes.

There are two ways to classify the exposures. First one is to develop some standards as:

• Exposure Dollar (Exp $): 10% variance in the dollar exchange rate against the reporting currency define by EBIDTA.

• Exposure Oil (Exp Oil): 10% variance in the fuel prices present define by EBITDA.

The second way is to classify the Exposures in an one risk-indicator with for example six levels and classify companies with a low- high risk profile.

Of course the new key figures have their own errors and uncertainties. Another objection could be the possibility of window-dressing. Although key-figures have a lower reliability (higher error-margin) in my opion it will still be enough to unmask risks and uncover some causes for a next financial crisis.

I am curious about your opinions on this matter. Please feel free to post your comments!