Risk Management In Business and project Environments
1.0 Learning to assess the risk management practices in a business
Risk is an inherent part of running any business. At its simplest, risk appetite can be defined “as the amount of risk, on a broad level, that an organisation is willing to take on in pursuit of its strategy.”
Successful organisations consider effective risk management to be essential to the successful achievement of its strategic objectives.
Company’s outline their controls and measurements for Risk in a Risk policy, which outlines its risk management objectives and establishes roles and responsibilities for the effective management of risk throughout the group.
The audit and risk committee, under delegation from the senior management, monitors the nature and extent of risk exposure against principal risks and advises the CEO in its consideration of overall risk appetite, risk tolerance and risk strategy of the group. Details of the activities undertaken by a limited Organisation and the audit and risk committees are presented to the public and shareholders in the annual reports.
All Committees have a role in monitoring and overseeing risk topics within their areas of competence and ensuring adequate coverage of risk oversight on behalf of the Organisation. Business units are responsible for identifying, assessing and managing risks in their respective areas. At executive level, the Executive Director Risk Forum and the Group Risk Management Committee review principal and emerging risks and ensure the fundamentals of good risk management are incorporated into decision making at all levels of the group.
Often large companies have Group Internal Audit (GIA) an independent appraisal function charged with reviewing company activities across all areas within the business as a service to the management. GIA objectively reviews and reports on the management of risk, the adequacy of internal control, and on the achievement of proper, efficient, effective and economic use of resources.
External partnerships with independent authority to review the operations such as Deloitte are often contracted by organisations to support the Risk management function. This contract would provide increased access to the following:
- Specific skills/expertise required for certain audits as noted above, where it is inappropriate and difficult to build and retain those skills in house.
- Specialised internal auditing expertise/experience
- Opportunity to learn from co-source provider with cross industry experience regarding emerging risks, best practice methodologies and tools.
These principles and policies provide good governance in assessing risk internally and externally in the organisation. Group Internal Audit operates with total independence and authority in relation to audits carried out by the function and has unrestricted access to Chairman, Chief Executive and the Chairman of Committees. This authority is important to ensure diligence within the organisation. It eliminates the possibility of internal affairs being established which would jeopardise the operations of an organisation and its Financial standing. Organisations Internal Audit is authorised to examine any of the activities of the business, its subsidiaries and associated companies. Group Internal Audit also has unrestricted access to all records, assets and personnel necessary to discharge its responsibilities.
Managers at all levels in are responsible for managing risk in their area of responsibility, including the identification, assessment and mitigation of risk through appropriate actions/controls.
Managers are also responsible for reporting of risk in line with local risk management processes. Each Business Unit will also have a senior manager responsible for risk management and oversight at business unit level. They will support the Directors and their Senior Management Team with their overall consideration of risk.
1.3 Assessment of current risks.
Organisations strategy recognises that its industry is undergoes significant and sometimes an accelerating transition due to competition, regulation, developments in its delivery of services and changes in customer behaviour. The organisation reviews the risks of this environmental change throughout the business divisions to counteract as best it can any deviations from the strategy. All of this is driven by society’s customers’ expectations and choice in the market and the organisations stakeholder’s requirements.
In the Energy market strategies are focused on the opportunities this changing industry landscape presents and the significant role which energy will play in building a low-carbon energy future.
Not alone are domestic and SME's reviewing their electricity models, heating applications (Appendix A), energy consumption, but national and EU regulators also controls ability of energy organisations to flux their charging models.
To manage the risk of being competitive in the market in Ireland, over the next decade and a half, Energy suppliers will completely renew its generation portfolio, replacing older fossil fuel plant with a mixture of renewables and high efficiency gas turbines to cut the carbon intensity of generation fleet. Their will require a large investment strategy significantly into its Gas or Electricity networks and new smart technologies, to enable the widespread consideration of microgeneration, importing, exporting, change of heating systems, electric cars and transport and to put the customer at the centre of a very different supply system.
To outline personally the risks, I see in the Electricity business I would identify the following:
- Changing markets
- Cars to electrification
- Ability to charge with varying models due to smart metering implementation
- Diversification into partnerships to deliver broadband over the network.
- Smart Networks
The most important aspect of financial risk is to ensure decisions are based upon maximising shareholder value. This is done by maximising the value of organisations assets.
Reviewing the debt to asset ratio of your company otlines its potential profits. To operate profitably it is imperative that your organisations gets the value from all its assets so that it generates an appropriate Return on Capital Employed. This includes using and operating these tangible assets, as well as non-tangible assets (for example, data) in a way that extracts maximum value.
How this is adjudicated against other organisations is through independent external evaluation such as a Moody’s rating. A credit rating is an independent assessment of credit worthiness and financial strength. It is required to gain access to debt capital markets at competitive interest rates. Large companys strive to retain a credit rating ofor equivalent on a stand-alone basis, (or improve on this rating).
Similarly, your organisation needs to determine its asset base and identify a strategy to maximise its assets efficiently delivering through the value chain to its customers. This inherent culture will thus perform a value to the stakeholders but also increase the value of the company and in turn increase its share values. Share value increases attract high investors which in turn produces the business cycle to reinvest in the organisation’s assets and operations to cyclone the cycle to a valuable enterprise against its competitors.
2.0 What steps can be taken to ensure risk management practices more accurately capture underlying business risk?
2.1 Relying on Historical Data
Reflecting on past performance of both the current company and its competitors allows for realising future risks to the organisation under review. Risk-management modelling usually involves extrapolating from the past to forecast the probability that a given risk will materialise. The next challenge would be to make sure you have accounted for all the risks you know or should know you’re exposed to.
Risk Management captures risk but can still end up failing because the people responsible for incurring risk don’t report it, unreported risks tend to expand. Suppose a manager for a function in your organisation doesn’t report a risk then the risk is not managed across the business, decisions are being made by senior management without full knowledge of the practicalities or true representation of the operations.
Risk management is a dynamic process. Risk managers are responsible for making sure that the firm takes only the risks that it wants to take. They must constantly monitor, hedge, and mitigate the firm’s known risks.
It is always tempting for a risk manager who makes a presentation to the board or the CEO to overstate the company’s ability to measure risk.
3.0 Risk templates for management of financial risk in your sector/company.
A template above is ideal for managing risk in your organisation. Identifying the risks in a project and assigning responsibility and reporting structures to the risk ensures the risk is eliminated or managed to be effusively reduced.
4.0 Conclusions for NPV analysis
Managing these risks are vital to the success of a transition or project in an organisation.
Your organisation must earn a certain level of profit, so that it can pay the interest on its borrowings, pay tax and dividends, repay its borrowings as they fall due and reinvest very significant amounts to establish a competitive advantage.
Techniques such a Net Present value is vital to mitigate the risk of a successful project on the organisation’s capital and resources.
Risk strategy’s roles responsibly monitoring and internal audits are vital to ensure compliance and give managers roadmaps in their decision making on a daily basis. A culture working together to achieve the same goals, objectives as outlined in its mission statements.
5.0 Project Risk
I intend to satisfy the readers expectation to calculate risk effectively. Describing a program/Project, its purpose and present the financial data for investment and returns or savings to achieve sponsorship.
5.1 This section presents the methodology of determining value and calculated risk for a project.
The hypothetical project I have taken to assess in this section is to determine whether an investment of a Solar panel on an SME building in today’s market is value for money. Ideally, I am looking for an NPV of +1 to enable me to advise the director of the SME that this would be a good project to be in our Capex model for the year.
Solar PV, or solar electric, is a growing technology in Ireland, mainly in commercial buildings. Solar PV generates DC electricity on your roof and uses inverter technology to change to AC electricity for use all around your building.
It also has the following benefits:
- Solar PV systems can carry a 20-year guarantee.
- Saves the environment:Solar PV helps reduce the emission of CO2 and reduce the need for electricity generation from fossil fuels and therefore protects the environment.
Comparing windfarm to PV, I analysed that a PV of 5Kw would cost €15000 as oppose to a turbine of same Kw costing €20,000 and probably another €10,000 installation fees. Not alone, space, safety, installation costs for this program I am considering an SME such as UCC as my example. UCC does not have the space for a large Turbine. PV is much suited to an urban environment in the geographical area.
UCC uses 19,775,000 KWh of electrical Energy per year.
Approximately 50% of the electricity on the campus is generated via a CHP thus the remaining demand is approximately 10,000,000 KWh or 28,409KWh per day.
Electric Ireland – the average usage of 4200 kWh electricity a year would result in an annual electricity bill of €1006, this will be the calculation of saving by dividing the KWhr installation by 4200.
Thus, an assumption is that UCC’s daily bill is:
28,409/4200 = 6.764
6.764*€1006 = €6,804
We will aim to set up an Array that would reduce the grid supply by 2% (a grid array of ~550 KWhr per day or ~ €50k a year (550*365, /4200, * 1006)).
I would suggest splitting a number of arrays across a variety of rooftop buildings, the Kane, Science, Economics and Art buildings.
The following costs are incurred: -
- Desktop survey €764 + Vat
- Smart Meter €654 +Vat
- Relay €1000 + Vat
- €16k disconnection for sme with own transformer 10kv – 20kv
- Available sunlight will vary depending on where the installation is. for the sake of an example, if you are getting 5 hours of direct sunlight in a sunny area you can calculate it this way: 5 hours x 290 watts (a wattage of a premium solar panel) = 1,450 watts or roughly 1.5 kilowatt-hours (kwh). Thus, each solar panel in your system would produce a little over 500-550 kWh of energy per year.
- Assume UCC has 6 hours sunshine a day
- Accelerated CapitalAllowances: the ACA is a tax incentive aimed at companies paying corporation tax, sole-traders and non-corporates. The scheme allows them to write off 100% of the purchase value of qualifying energy efficient equipment against their profit in the first year of purpose. Solar PV systems can qualify for the scheme provided the model of solar panel is registered on the Triple E Register.
- Broadly speaking home PV systems should range from around €1,500 - €2,000 per kW installed (ex-VAT) we will assume a median of €1800.
- Grants: Assume €15k allowed for this project
- The panels and inverters will require cleaning approx. every 10 years. Panel output should be expected to fall at a rate of 1% per year. I have included a multiplier of .99 as a drop-in efficiency per year.
Future additional gains
- The main part of this is derived from the Renewable Energy Feed in Tariff which would pay a set amount of money per kWh of electrical energy generated. The Republic of Ireland does not have any Feed in Tariff for solar PV at present. Although UCC consumption is far greater than the panel production so this would be unlikely but should be considered for another SME’s.
Using DCF techniques, proposing an NPV for the program and make a recommendation on go/no go decision for the project. I have used a discount rate of 10% and minimum timeframe of 5 years of investment.
First, we calculate the total installation cost = €298,620 an initial upfront payment if not getting a loan. Once the future avoided electricity costs are determined considering the inflation rate of assumed 2%, the annual net cash flow is calculated.
The discount cash flows calculation considers the 10% discount rate, the year, and the annual cash flow. Finally, the cumulative NPV column is calculated. This is combining the NPVs to come up with the final NPV of year 25.
In this instance the Value of the NPV is positive @ €108,773 and thus the project is a go.
The NPV is above zero, which is good, and the IRR is positive and greatly above 10% which is good. Overall this means that the financial benefits outweigh the costs and this type of project has intangible benefits such as commitment to green energy facilitating college learning and teachings and representing the governments directives to EU.
5.3 Conclusion for 5.0
The switch to alternative energy sources to power electricity has become much more common in today’s society, especially through solar energy. The installation of solar panels is advertised throughout SEAI with the use of incentive programs.
These incentive rebates and grants are set up to help people afford and promote to switch to solar and thus help improve the environment.
The purpose of this project was to determine if applying solar to UCC was going to prove cost-beneficial or detrimental.
The NPV was calculated using the annual cash flows which considered avoided electricity costs, the system cost, and any incentives, the overall investment proved positive. The total cost of the solar panels is €298,620. The NPV is €108,772, and the IRR is 15%. Both calculations show the investment is financially positive and that switching to solar will be cost-beneficial.
5.4 Identify risks and opportunities with the program that will impact the decision.
5.4.1 Opportunity of Solar Panels
UCC has a responsibility as a state supported organisation to ensure best value for money from its assets. It has a duty of care to the environment and support its stakeholder’s objectives in aligning to zero carbon in the use of energy.
If, as in most cases, your solar PV panels operate in parallel with your mains supply, they help to displace the energy you would normally have bought from the grid. For example, if your electricity deemed at a time is 20kW and your PV system was producing 5kW, your net import from the grid would be 15kW. Each unit of electricity you displace from your imported requirement effectively saves you on the imported price of that unit. If you buy your energy at 16 cents per kWh and you displace 10,000kWh you save €1,600.
Solar PV products meeting the required European and international standards can be registered on the SEAI Triple E Register for accredited energy-efficient equipment. Companies paying corporation tax, sole-traders and non-corporates that purchase listed solar PV products can qualify for a favourable depreciation regime under the Accelerated Capital Allowances scheme, and for VAT refunds.
UCC can incorporate site visits on site for courses which include this type of technology, mechanical, civil, electrical Engineering to aid their learning deliverables.
5.4.2 Risks of Solar Panels
Wind: Roof-mounted solar panels, which increase a roof's surface area, can create increased loading and risk of roof damage when exposed to heavy winds. In addition, strong winds may cause PV systems to move or detach completely, which can also lead to injuries or other property damage. Building insurance may increase because of this factor also indemnity insurance may be affected.
Solar panels are very light. Each ~5.5 ft. x 3.5 ft. solar panel only weighs around 40 pounds. Despite the lightweight, solar panels and racking can hold snow in extreme conditions.
There are two sides to a solar energy installation. Alternating Current (AC) and Direct Current (DC) energy.
The solar panels themselves produce DC current —short for “direct current.” DC is different than the electricity that runs through your home. This type of electricity is called AC current, or “alternating current.”
The electrical current that your solar panels create must go through a device called an “inverter.” This inverter changes the DC current from the solar installation into the AC current used in your home. When the electricity leaves the inverter, it must be integrated with your home’s electrical system under the general supervision of a licensed electrician.
Improperly integrated currents can cause electrical problems and electrocution hazards that are extremely dangerous.
GIA Group Internal Audit
IRR Internal Rate of Return
KWhr Kilo Watt Hours
NPV Net Present Value
SEAI Sustainability Energy Authority of Ireland
UCC University College Cork
Framework and Risk Management
Risk control and possible management
Three lines of defence model
Published at pmmagazine.net with the consent of Dale Clancy