Identifying financial risk: questions to ask your client

Content Summary

Has senior management reviewed a monthly cash flow forecast for the current financial year and has it been reconciled to the operating plan?
Is the forecast regularly reviewed and revised where appropriate?
Are actuals to variances reviewed and noted?
What capital expenditure is planned and how will it be financed?
If new funding needs to be included in the cash flow, is it committed or uncommitted? Have banks or other sources of funding been consulted? Do they have enough information to provide approval in principal?
Has senior management applied extreme (unlikely but possible) scenarios to determine weak points in the cash flow?

To what extent does the business rely on issuing uncommitted securities to raise funds? This means lenders or investors take a direct exposure to the business.
To what extent does the business rely on its bankers and shareholders to meet funding requirements?
Does the business’ ability to secure funding depend on maintaining a high, independent credit rating, a high-profile brand or continuity of business? If any of these factors are compromised, would it affect the ability of the business to attract or retain funding or investors?

Does the business have any form of borrowing or similar obligations that may be subject to a change in interest rates? This should include conventional borrowing, overdrafts, debtor or creditor terms and discounts, other contracts and the like.
Are there loans to third parties or investments that have flexible interest rates?
Are any income-producing assets reliant on interest rates?
How concentrated is the timing of any interest rate resets?

Does the organisation clearly identify all foreign exchange exposures?
Are there any internal or natural hedges that could offset any impact on reserves or operating profit?

Does the organisation rely significantly on specific commodities whose prices are determined by the market for its inputs or outputs?
Will price movements significantly affect profitability by increasing manufacturing costs or reducing sales proceeds?

Has the organisation entered into any significant financial transactions which in aggregate amount to a material exposure to any one counterparty, especially in one currency or one country?
Has the counterparty risk been assessed and accepted for each deal?

Does the organisation have effective computer systems, processes and people to conduct and monitor the business?
Does the organisation have effective back-up and disaster recovery procedures for computers and systems used for accounting and financial administration, including treasury activities?
Does the organisation have effective personnel and human resources policies?