How to manage financial risk

, posted in Blog Blog

No matter the industry, running a company is all about maximizing opportunities and minimizing risks. Risks come in all stripes: financial, technological, regulatory, strategic and operational.

Keeping track of so many new and unpredictable risks can seem daunting − even for seasoned corporate executives. It’s no wonder, then, that risk management departments have become common in all industries, especially those with global reach.

In the case of business aviation, exposure to risks of all kinds has always been high. Fortunately, technological innovations such as Big Data, risk management software and machine learning/AI, can help you assess and reduce the risks to your business.

Here are tips for managing financial and business risks.

A strategy for doubtful debt

Customers not paying fees, or paying late, is a perennial challenge for businesses. For business aviation companies waiting on high-value transactions, this common phenomenon is especially painful.

You can reduce these financial risks by going back to basics. Do thorough background checks on customers, including, where possible, credit scores to assess the risk that a customer may default on a payment. This can stop bad debt from creeping up and reducing profits. Track the average payment time of each customer. A few weeks before the invoice is due to be paid send payment reminders to late payers. In the most serious cases, stop doing business with them.

Technology can automate most of these tasks and flag problems at an early stage, when they’re easier to fix.

Technology that helps you stay compliant

What work issues do executives worry about the most? Regulatory compliance would probably be in many executives’ top five. There are things you just can’t get wrong: complying with national and international tax regulations, anti-terrorist laws, passenger screening, safety laws and anti-money laundering regulations, to name a few examples.

Failure to comply with regulations can result in multi-million, or even multi-billion dollar fines, and damage corporate reputations.

Companies should review their internal procedures for complying with regulations and checking that their data is accurate. Happily, innovations like regulatory compliance software, biometric identity verification and Big Data insight gathering are helping make compliance less labor intensive, quicker and cheaper.

Much of this technology is being developed by financial services companies and “fin-tech” start-ups. If successful, it’s likely that it will be adopted by other industries, including business aviation.

In the future, blockchain (which provides an open, secure digital record of a transaction) will likely be a key technology in ensuring and proving compliance. Though it’s currently associated with digital currencies, it has a near-endless number of use cases, such as verifying air passengers’ identity (digital passports) and keeping a record of passenger luggage in transit.

Get ahead of fraud

Financial fraud costs businesses $3.35 trillion worldwide, according to research published in 2017 by accounting firm Crowe Clark Whitehill. Business fraud has been on the rise since 2008, with businesses and individuals vulnerable to small-scale and large-scale cyber fraud.

Business fraud includes false accounting (when company assets are overstated or liabilities are understated), payment scams (e.g. creating bogus customer records and bank accounts so that false payments can be generated) and procurement fraud (e.g. payment for goods or services that are not delivered).

The International Air Transport Association (IATA) estimates that payment fraud costs the aviation industry about $858 million each year, of which $639 million is borne by airlines.

In business aviation, common types of fraud include criminals paying for flights using stolen or fake credit-card details, stolen air miles and fraudulently claimed air miles (knowingly providing wrong information to get loyalty points; claiming miles for sectors already accrued), and employee fraud (for example, by call-center employees).

Technology can help prevent fraud and detect it earlier. For example, new financial software is using AI to learn the markers of fraud and sift through large amounts of financial transactions to spot fraudulent transactions.

But technology is only part of the solution. Business aviation companies should review their safeguards against fraud. The safeguards can be simple − for example, when a supplier requests changes their bank account details, you call them to check that they’re not a fraudster, rather than relying on a second signature to authorize the change.

Training staff in detecting fraud, and what to do when they spot it, can also help reduce fraud. So can taking part in aviation industry schemes to reduce fraud, such as the one organized by the IATA.

Finally, companies should regularly review their procedures for reporting fraud to the relevant national and international authorities. An internal auditor or compliance department could do this. Your auditing firm, which will ideally have experience in forensic accounting, could also investigate the fraud.

Hedge variable costs

Fluctuations in the costs of fuel and currencies can have a significant impact on the capacity and profits of the aviation industry. Companies have long used a technique called “hedging” (an investment to offset any loss in another investment, such as a rise in the price of oil or the value of a currency) to manage these risks.

Financial hedging involves complex financial instruments (derivatives), analyzing stock markets and global financial, economic and political factors.

Some companies outsource their hedging to businesses that specialize in risk management. Others do their own, using treasury management systems – software that comes up with a hedging strategy for a business and manage it.

Managing business risks will never be easy, or an exact science. Fortunately, new technologies (combined with human intuition and experience) can help make risk assessment less onerous and time-consuming.

By Magnus Henriksson, Managing Director at PayNode

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