Finance and Risk Management Are Interconnected
I recently had a conversation with a Finance Officer at a mid-size company, where we discussed Enterprise Risk Management (ERM) and Captive Insurance Companies (CICs). This company is successful and growing with complex operations, hundreds of employees, over one hundred million dollars in annual revenue and millions of dollars of annual profit as well. He is clearly a strategic thinker and fully grasped the benefits that ERM with CICs could afford his company. However, he was also convinced that his CFO would either not grasp ERM or simply choose to “stay in the box.” He said two things that really struck me. First, he said, “Our CEO hates insurance.” Second, he said, “We just don’t focus on risk management…we renew our insurance policies annually and try to spend as little as we can.”
These comments likely reflect the sentiments of business owners and executives at many mature and growing companies. Clearly, this CEO views insurance as a “grudge purchase” or a “necessary evil.” It’s simply a cost to be born and certainly isn’t as energizing as crafting strategies to grow the business. This mindset is also short-sighted, addressing risk and insurance in one year increments.
However, in addition to Operating Strategies focused on growth and profits, successful companies also need solid Finance Strategies. Finance Strategies can include CAPEX planning, identifying cost-savings, analyzing the deployment of capital, hedging raw materials used by the business, etc.
For mature and growing companies, risk management ought not be seen simply as an afterthought or a tiresome part of the business to be completely delegated to an outside insurance broker. Business owners, executives and CFOs of successful businesses should consider making risk management a core financial strategy. After all, all risk management is financial, and all financial aspects of a business are at risk. Risk and Finance are thoroughly intertwined.
Making risk management a core financial strategy requires a paradigm shift from viewing risk management as a cost center to viewing risk management as a profit center. Perhaps paradigm shift is an understatement? How is it possible to view risk management as a profit center? It’s possible because business owners and executives can choose to own their own insurance company as part of an overall Enterprise Risk Management (ERM) strategy. This pivotal decision is a financial game changer.
Successful Finance Strategies often require powerful tools. CLICK HERE to read “Turning Sunk Costs Into Sunk Profits,” which details not only how to VIEW your risk management strategy as a profit center, but how to MAKE it into a powerful profit center with the right tools – specifically, owning one or more captive insurance companies. As I ponder the comment, “Our CEO hates insurance,” I can’t help but think, ”That is precisely why you need to own your own insurance company… don’t hate it, embrace it!”