Friday, February 9, 2007
Financial Planning..UNTOUCHED!!
There is a lot of consulting and advice for people. You take a look and 100 of institutions are around to help you in reviving your life. There’s one thing, which is looked at more seriously, and that is Investments. Catchy punchlines like "Secure your life" is not new. Stocks, bonds, derivates, futures and options are not more on the Glossary; they have become common man's language. There have been diversities in the products offered by these financial institutions. Investment in stocks, insurance, government funds, are very common. The websites of these institutions give knowledge on the performing stocks in the market and information on financial products in the market. But, one thing which is untouched is complete financial planning for an individual. There are very few players in the market who do financial planning for individuals. The market is still untapped. There are mutual fund managers who manage just the portfolio of an individual. But,the question arises does that link to complete planning. If anyone is interested on this topic, please give your comments and I'll help you the case more clearly.
How to Manage RISK:For Start-up Companies
Risk is an event that may affect the overall business objectives of an enterprise. It should be viewed as an opportunity rather than a threat that every enterprise should try to foresee so that the effects of the events can be optimized. Sometimes, risks make the organization more alert and responsible to create value for shareholders. If an organization is able to properly define risks and articulate them, then most of the objectives are achieved. To gain a sustainable competitive advantage, companies facilitate proper risk. Firms keeping its culture, strategies, and economic conditions in mind should develop a proper framework for management of risks. A framework gives a clear picture of the risks faced and the strategy to mitigate it.I am unable to show the picture of the framework as it does not support it.The five steps involved in preparing VOWEL framework for Risk Management are:
1.Understanding risks.
2.Identifying risks.
3.Analyzing risks.
4.Exploiting risk opportunities.
5.Optimizing or mitigating risks.
The A, E, I, O, U framework takes into consideration various factors like Organization’s strategies, culture, objectives and various external and internal conditions. The proposed framework is the best approach as it helps the organizations in turning an uncertain event to an opportunity where it could reap the maximum benefits. The framework proposes Integration of Risks in exploiting risk opportunities. VOWEL Framework discuss in gaining the profits out of an event and then mitigating the negative effects. When the organization starts risk management process, influence of risks on the organization is high and the probability of returns is low but as soon as the process moves forward, influence of risks becomes low and probability of returns is high.
Understanding Risks:
Proper understanding of risks is a pre-requisite for an effective Enterprise Risk Management framework. Understanding of risks doesn’t involve knowing the risks and its impact on the organization but assessing the historical and current performance along with focusing on future performance in the context of the risks. Understanding of risks also includes the risk appetite of an organization. If an organization is in profit for some years and have enough capital, then it can expose itself to greater amount of risks. Understanding of risks also involves evaluating company’s current strategy and management’s capability to implement a different strategy if the company faces some difficult situations due to risk exposure.
Identifying Risks: The next most crucial step in Enterprise Risk Management is identifying key risk areas in the organization. The risks faced by the organizations today are enormous, varied and of different frequencies. Involving employees from various departments in the organization helps in better identification of risks, as their involvement in the job and opinions about the future and current risks is known. The risk identification techniques adopted by organizations are Brainstorming Sessions, Questionnaires, Interviews, Feedback forms, Workshops and SWOT analysis. The organization can also take the help of external agents like risk consultants, consultancy agencies, auditors etc. Other alternatives like flowcharts, process mapping, scenario analysis helps a lot in identifying risks.
Analyzing Risks:Analyzing and assessing risks helps in understanding the effect of identified risks on the objectives of the organization. There are various techniques of analyzing risks. Some of the most effective ways are:
ØProbability-Impact Chart: Probability- Impact Chart is basically used for assessing hazard risks and operational risks, which occur due to, failed systems and processes and human errors. Before analyzing the probability and impact, organization should list down all the possible emergencies that may occur in a particular course of time and then make a chart of probability and impact.
ØMonte Carlo Simulation: Monte Carlo Simulation means analyzing a large number of market scenarios with the same underlying distribution. For each scenario the value of position is calculated. These are widely used in pricing and risk management of complex instruments.
ØHistorical Simulation: Historical simulation is the simplest and most transparent method of calculation. This involves running the current portfolio across a set of historical price changes to yield a distribution of changes in portfolio value, and computing a percentile (the VaR). The Historical Simulation method requires that the user obtain historical information on the movement of market factors (share prices, interest rate yield curve, exchange rates, commodity prices etc), which determine the performance of the financial instruments that are in the current portfolio.
ØStress Testing: Stress testing is a Risk Management tool used to evaluate the potential impact of a specific event on a firm. Stress tests generally fall into two categories: scenario tests and sensitivity tests. In scenarios, the source of the shock, or stress event and its effects on the financial risk parameters are well defined. In contrast, sensitivity tests specify financial risk parameters; the source of the shock is not identified. Moreover, the time horizon for sensitivity tests is generally shorter in comparison with scenarios. Stress testing is used by the organizations to:
·Understand portfolio performance during abnormal market conditions.
·Understand the risk profile.
·Make proper decisions regarding the risk tolerance and allocation of capital to optimize risks.
·Evaluate the business risks.
Exploiting Risk Opportunities:The term risk has two aspects i.e. risk as a threat and risk as an opportunity. Organizations are aware of the fact that viewing risk as an opportunity can give them a competitive advantage and can fetch rewards. Risks should be exploited in such a way that maximum advantage can be taken from any unexpected event. Exploiting risks can be done by:
1.Understanding the nature of the risks.
2.Responding to the risks
Every organization should adopt PEST approach for understanding the nature of risks. PEST represents political, economical, social and technological.Not only external factors play a role in understanding the nature of risks but also the organization itself can be a cause for the risks to arise. The business objectives, the skill set of managers and employees, mergers and acquisitions etc. can be a contributing factor to the evolution of risks in an organization. Continuous monitoring and review should be done for Enterprise Risk Management to be successful. Monitoring involves reviewing information and taking appropriate actions.
Monitoring processes include reviewing and acting on performance and risk information, auditing of control systems, processes and financial and operational information, self-assessments, updating the risk information. After the monitoring process, reporting should be done to management and staff, board of directors and regulatory agencies and other stakeholders etc. Monitoring ensures that the components of enterprise risk management are applied at all levels.One of the best ways to exploit risks is Integration of Risks. Integration gives an overall view of the risks faced by the company and their interrelation. Risks are interrelated and interdependent in some form of or the other. Integrating them under one platform and applying metrics to quantify those makes easy for the organizations to exploit the best from the uncertainty.
Optimizing Risks:Optimization of risks is done to minimize the effects of risks on the organizations. In this step the organizations try to lessen the negative effects of risks that may affect the business processes. Optimization of risks can be done in various ways:
ØThe risks frequently faced by the organization and the solutions to mitigate should be properly documented and stored in the database so that every new employee joining the organization could know about it and make themselves prepared to face it.
ØThe Senior Management should take a pivotal role in training every employee on the importance and understanding of risks. Transfer of knowledge is essential for Risk Management.
ØProper metrics should be defined on how the organization mitigates the risks so that the employee can look forward to improve on the processes they use to minimize the effects of risks in an organization.
ØThe employees should be encouraged to “Change”. Sometimes, the employees are resisted to Change and want the things to happen in the same way. Sometimes, a major risk may force an organization to change its strategies, organization culture etc.
ØThe organizations should have their processes and systems in place so that the risks can be mitigated immediately and business processes of the organization are not affected.
ØThe shareholders should be notified of the risks faced by an organizations and the approach the organization follows in mitigating the risks so that they have faith on the organization and continuously show support and inclination towards the organization policies.
1.Understanding risks.
2.Identifying risks.
3.Analyzing risks.
4.Exploiting risk opportunities.
5.Optimizing or mitigating risks.
The A, E, I, O, U framework takes into consideration various factors like Organization’s strategies, culture, objectives and various external and internal conditions. The proposed framework is the best approach as it helps the organizations in turning an uncertain event to an opportunity where it could reap the maximum benefits. The framework proposes Integration of Risks in exploiting risk opportunities. VOWEL Framework discuss in gaining the profits out of an event and then mitigating the negative effects. When the organization starts risk management process, influence of risks on the organization is high and the probability of returns is low but as soon as the process moves forward, influence of risks becomes low and probability of returns is high.
Understanding Risks:
Proper understanding of risks is a pre-requisite for an effective Enterprise Risk Management framework. Understanding of risks doesn’t involve knowing the risks and its impact on the organization but assessing the historical and current performance along with focusing on future performance in the context of the risks. Understanding of risks also includes the risk appetite of an organization. If an organization is in profit for some years and have enough capital, then it can expose itself to greater amount of risks. Understanding of risks also involves evaluating company’s current strategy and management’s capability to implement a different strategy if the company faces some difficult situations due to risk exposure.
Identifying Risks: The next most crucial step in Enterprise Risk Management is identifying key risk areas in the organization. The risks faced by the organizations today are enormous, varied and of different frequencies. Involving employees from various departments in the organization helps in better identification of risks, as their involvement in the job and opinions about the future and current risks is known. The risk identification techniques adopted by organizations are Brainstorming Sessions, Questionnaires, Interviews, Feedback forms, Workshops and SWOT analysis. The organization can also take the help of external agents like risk consultants, consultancy agencies, auditors etc. Other alternatives like flowcharts, process mapping, scenario analysis helps a lot in identifying risks.
Analyzing Risks:Analyzing and assessing risks helps in understanding the effect of identified risks on the objectives of the organization. There are various techniques of analyzing risks. Some of the most effective ways are:
ØProbability-Impact Chart: Probability- Impact Chart is basically used for assessing hazard risks and operational risks, which occur due to, failed systems and processes and human errors. Before analyzing the probability and impact, organization should list down all the possible emergencies that may occur in a particular course of time and then make a chart of probability and impact.
ØMonte Carlo Simulation: Monte Carlo Simulation means analyzing a large number of market scenarios with the same underlying distribution. For each scenario the value of position is calculated. These are widely used in pricing and risk management of complex instruments.
ØHistorical Simulation: Historical simulation is the simplest and most transparent method of calculation. This involves running the current portfolio across a set of historical price changes to yield a distribution of changes in portfolio value, and computing a percentile (the VaR). The Historical Simulation method requires that the user obtain historical information on the movement of market factors (share prices, interest rate yield curve, exchange rates, commodity prices etc), which determine the performance of the financial instruments that are in the current portfolio.
ØStress Testing: Stress testing is a Risk Management tool used to evaluate the potential impact of a specific event on a firm. Stress tests generally fall into two categories: scenario tests and sensitivity tests. In scenarios, the source of the shock, or stress event and its effects on the financial risk parameters are well defined. In contrast, sensitivity tests specify financial risk parameters; the source of the shock is not identified. Moreover, the time horizon for sensitivity tests is generally shorter in comparison with scenarios. Stress testing is used by the organizations to:
·Understand portfolio performance during abnormal market conditions.
·Understand the risk profile.
·Make proper decisions regarding the risk tolerance and allocation of capital to optimize risks.
·Evaluate the business risks.
Exploiting Risk Opportunities:The term risk has two aspects i.e. risk as a threat and risk as an opportunity. Organizations are aware of the fact that viewing risk as an opportunity can give them a competitive advantage and can fetch rewards. Risks should be exploited in such a way that maximum advantage can be taken from any unexpected event. Exploiting risks can be done by:
1.Understanding the nature of the risks.
2.Responding to the risks
Every organization should adopt PEST approach for understanding the nature of risks. PEST represents political, economical, social and technological.Not only external factors play a role in understanding the nature of risks but also the organization itself can be a cause for the risks to arise. The business objectives, the skill set of managers and employees, mergers and acquisitions etc. can be a contributing factor to the evolution of risks in an organization. Continuous monitoring and review should be done for Enterprise Risk Management to be successful. Monitoring involves reviewing information and taking appropriate actions.
Monitoring processes include reviewing and acting on performance and risk information, auditing of control systems, processes and financial and operational information, self-assessments, updating the risk information. After the monitoring process, reporting should be done to management and staff, board of directors and regulatory agencies and other stakeholders etc. Monitoring ensures that the components of enterprise risk management are applied at all levels.One of the best ways to exploit risks is Integration of Risks. Integration gives an overall view of the risks faced by the company and their interrelation. Risks are interrelated and interdependent in some form of or the other. Integrating them under one platform and applying metrics to quantify those makes easy for the organizations to exploit the best from the uncertainty.
Optimizing Risks:Optimization of risks is done to minimize the effects of risks on the organizations. In this step the organizations try to lessen the negative effects of risks that may affect the business processes. Optimization of risks can be done in various ways:
ØThe risks frequently faced by the organization and the solutions to mitigate should be properly documented and stored in the database so that every new employee joining the organization could know about it and make themselves prepared to face it.
ØThe Senior Management should take a pivotal role in training every employee on the importance and understanding of risks. Transfer of knowledge is essential for Risk Management.
ØProper metrics should be defined on how the organization mitigates the risks so that the employee can look forward to improve on the processes they use to minimize the effects of risks in an organization.
ØThe employees should be encouraged to “Change”. Sometimes, the employees are resisted to Change and want the things to happen in the same way. Sometimes, a major risk may force an organization to change its strategies, organization culture etc.
ØThe organizations should have their processes and systems in place so that the risks can be mitigated immediately and business processes of the organization are not affected.
ØThe shareholders should be notified of the risks faced by an organizations and the approach the organization follows in mitigating the risks so that they have faith on the organization and continuously show support and inclination towards the organization policies.
KNOWLEDGE TRIANGLE
Knowledge is imperative. Knowledge appetite is different for different people. Every individual goes to the transition process of knowledge. Especially, when an individual joins an organization, the thought process develops as he undergoes the process of knowledge transition. Every individual is in the center of the Knowledge Triangle.
Knowledge Triangle consists of three dimensions:
a.Pre-Knowledge
b.Post-Knowledge
c.Acquired Knowledge
Pre-Knowledge:
Pre-Knowledge is the knowledge, which the individual gains before joining the organization. This involves the education of the individual before he takes over the responsibilities as an employee of the organization.
Post-Knowledge:
Post-Knowledge is the knowledge, which the organization provides to the individual to perform for the role for which he has been recruited.
Acquired Knowledge:
Acquired Knowledge is the knowledge, which the individual himself gains because of his interests. The knowledge acquired could be from books, knowledge portals, blogs etc.
However, conflicts can arise if the three mentioned above are not in sync according to the individual’s interests and the same can give arise to Distorted Knowledge. If the individual does not work for something which he has acquired the education and it does not matches his interest area, then the knowledge boundary gets limited. As a result, he loses interest in the Post Knowledge, forgets Pre Knowledge and suddenly there is no progress on Acquired Knowledge due to frustration. The consequence is Distorted Knowledge, which is a mixture of the three i.e. there is a continuous effort from the individual to some how link the Pre Knowledge with Post Knowledge and gain the Acquired Knowledge which no way helps him to enhance his Post Knowledge.
The organization should keep in mind the interests of the employees so that the knowledge remains intact in the minds of the employees and he is able to contribute the maximum to the Organization. It’s an observation that the attrition rate is high in some organization due to the arise in Distorted Knowledge. There can be ways in which the organization can help the employees in maintaining a proper balance in the above-mentioned dimensions of knowledge:
a.Conduct trainings pertaining to the interests of the employees. Sometimes, the employees do not get the required training according to their interests.
b.Organization should be flexible in moving employees from one department to another if they do not find their job profile interesting. If done strategically, then there could be two benefits: reduction in attrition rate and increase in the knowledge level of the employees.
c.Feedback should be taken from the employees and employee should give feedback to the organization whether the knowledge transfer is smooth or not. It gives an opportunity for both the employees and the organization to improve.
Knowledge Triangle consists of three dimensions:
a.Pre-Knowledge
b.Post-Knowledge
c.Acquired Knowledge
Pre-Knowledge:
Pre-Knowledge is the knowledge, which the individual gains before joining the organization. This involves the education of the individual before he takes over the responsibilities as an employee of the organization.
Post-Knowledge:
Post-Knowledge is the knowledge, which the organization provides to the individual to perform for the role for which he has been recruited.
Acquired Knowledge:
Acquired Knowledge is the knowledge, which the individual himself gains because of his interests. The knowledge acquired could be from books, knowledge portals, blogs etc.
However, conflicts can arise if the three mentioned above are not in sync according to the individual’s interests and the same can give arise to Distorted Knowledge. If the individual does not work for something which he has acquired the education and it does not matches his interest area, then the knowledge boundary gets limited. As a result, he loses interest in the Post Knowledge, forgets Pre Knowledge and suddenly there is no progress on Acquired Knowledge due to frustration. The consequence is Distorted Knowledge, which is a mixture of the three i.e. there is a continuous effort from the individual to some how link the Pre Knowledge with Post Knowledge and gain the Acquired Knowledge which no way helps him to enhance his Post Knowledge.
The organization should keep in mind the interests of the employees so that the knowledge remains intact in the minds of the employees and he is able to contribute the maximum to the Organization. It’s an observation that the attrition rate is high in some organization due to the arise in Distorted Knowledge. There can be ways in which the organization can help the employees in maintaining a proper balance in the above-mentioned dimensions of knowledge:
a.Conduct trainings pertaining to the interests of the employees. Sometimes, the employees do not get the required training according to their interests.
b.Organization should be flexible in moving employees from one department to another if they do not find their job profile interesting. If done strategically, then there could be two benefits: reduction in attrition rate and increase in the knowledge level of the employees.
c.Feedback should be taken from the employees and employee should give feedback to the organization whether the knowledge transfer is smooth or not. It gives an opportunity for both the employees and the organization to improve.
What to BRAND?
Branding is not new. The things, which sell today, are branded properly; whether it is a cartoon Mickey, chip like Pentium or an elegant Mercedez Benz. To make a brand in the market is not easy especially when your customers are more informed than you. But, something, which is of utter importance, is what to brand first? Product or yourself? To create an image of a product in the minds of the customers is an art. When you sell a product, you also sell yourself. Other than selling shoes, Nike sells itself to the customer as the right choice, the logo, which is a tick mark. The customers treat the person or the company as a value addition to the product who sells the product. Just consider the case of a salesman. He needs to be properly dressed and a smile on his face before he describes the product to the customer. I believe that every one of us should make ourselves a brand and differentiate ourselves from the herd. We need to perfectly measure our strengths and weaknesses to sell ourselves. I did the same while joining my organization. People know me as a person who can speak anything and on everything. That’s the way I have branded myself. There are many who sell themselves tactically. There could be serious repercussions if branding is neglected. To brand yourself the way you want is very easy
1.Work on your strengths and keep aside your weaknesses.
2.Flaunt your strengths whenever you are around people. Like, if you are a good speaker, you can enter the discussion and make some valuable addition or if you are the one who is good in negotiation, then you can very well make the discussion in your favour
3.Never try to avoid a person who gives you a feedback. Because, that could be an opinion of 10 other people whom you have not met
4.Polish your skills and try to be among people. If you are shy and introvert, branding does not help much. It means, you have created a niche for yourself and if you think, hats your market, well and good
Enough of branding?? Not really...Brand yourself to be on the other side. I mean the brighter side.
1.Work on your strengths and keep aside your weaknesses.
2.Flaunt your strengths whenever you are around people. Like, if you are a good speaker, you can enter the discussion and make some valuable addition or if you are the one who is good in negotiation, then you can very well make the discussion in your favour
3.Never try to avoid a person who gives you a feedback. Because, that could be an opinion of 10 other people whom you have not met
4.Polish your skills and try to be among people. If you are shy and introvert, branding does not help much. It means, you have created a niche for yourself and if you think, hats your market, well and good
Enough of branding?? Not really...Brand yourself to be on the other side. I mean the brighter side.
Get Driven by YOURSELF
Analysis. This is something, which is done by everyone everyday. But, when it comes to analyse oneself, it’s very difficult. Theories like SWOT fails because its not easy to accept your faults. Doing is difficult than saying. I'm writing about the inside me in my first post as the inside "Me" is responsible for my actions and decisions and not to forget Success. How to go about knowing oneself?? SWOT, Taking other's views or getting inspired from someone else. I was puzzled when I analysed myself. Everytime, I found something bad about myself, my immediate action was to neutralize it by finding some other facts. That really did not help me in knowing myself. Then, I realized something else. Rather than poking on facts where I succeeded, failures inspired me a lot. I found so many ways not to repeat the mistakes and ignore the wrong ways. That gave me an insight to hundred reasons for success. Getting driven by one really matters a lot. Building case studies putting yourself as the main actor help you analyse a lot about situations, decisions etc. Constant effort to the way of Betterment is difficult but if the journey is taken seeing failures, then I am sure, nothing can beat us.
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