WolfPAC Integrated Risk Management Blog

The Importance of Profit and Loss Statements in Enterprise Risk Management

| Author
Wolf & Company, P.C.

Having recently attended the Risk Management Association’s Advanced Operations Risk Conference, I am overflowing with ideas on how community based financial institutions can adopt world class risk practices and compete more effectively in the industry. We are experiencing the metamorphosis of enterprise risk management as community banking emerges from the recession and reinvents itself. Unfortunately, operational risk blind spots impact a risk manager’s holistic view of their institution, hindering this strategic change. That is why I have created a three part series to dig into three important areas of operational risk that should not be overlooked: Profit and loss statements, excessive growth, and completeness of the assessment process.

Profit and Loss Statements

The profit and loss statement has loads of important insight about each business function:

  • How did each business unit perform? (these are the actual results)

  • What was expected? (your budgets)

  • What is the volume of the transactions that support both numbers?

As a risk manager, you need to be equipped to read this financial data. Couple your accountant’s knowledge with your operational understanding of revenue and cost drivers, and you end up with a holistic view of how that business unit functions – and where there is high risk. Unexpected results, both good and bad, are often driven by the actions of people within the business unit. It is important for you to be able to deduce when a variance in expectation is due to luck or due to decisions made within your organization. This information gives you the ability to accurately assess your risk.

Don’t miss my second installment about another operational blind spot for risk managers: excessive growth.

TOPICS: Enterprise Risk Management ERM Risk Management Operational Risk

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