The management of financial risks in companies. a theoretical study

The activity of any company, whether financial or not, is framed in an environment where factors of all kinds coexist: economic, political, ecological, legal, sociological, among others. Not only profits but also its existence as a company will depend on the company's ability to adapt to changes.

These business organizations base their activity on: profit making, market growth, successful negotiation development, investment execution, public service provision and performance of a government function. But to achieve these objectives in an excessively competitive world, there are fundamental aspects that must be controlled, for example, satisfying the needs of customers, anticipating and acting in the face of movements of the competition, researching and developing more efficient options, providing products and services. of the highest possible quality, among others.

But a fundamental point that organizations must take into account is survival in case of catastrophic losses caused by accidents, negligence, lack of professionalism or any other cause of loss or harmful effect that threatens to interrupt the operations of the organization, for its growth or reduce your profits. All of the above is summarized in Risk Management in companies, in which the development of this research will be framed, which aims to: Present the theoretical and conceptual foundations of Risk Management based on national and international experiences as well as analyze the need to carry out Risk Management in business entities.

financial-risks-in-companies

DEVELOPING:

Theoretical and conceptual foundations of Risk.

First, risk affects future events. Today and yesterday are beyond what we can worry about, because we are already reaping what we previously sowed with our actions from the past. The question is, can we therefore, by changing our current actions, create an opportunity for a different and, hopefully, better situation for ourselves in the future. This means, secondly, that risk implies change, which can be caused by changes of opinion, actions, places… Third, risk implies choice and the uncertainty that choice entails. Therefore risk, like death, is one of the few inevitable things in life.

In many modern languages the word for risk has the same root - the Spanish "risk", the French "risque", the Italian "rischio", the German "risiko", the English "risk", comes from the Latin risicare. In ancient times they called risicare (lat.) The ability to navigate around a reef or rock. It actually has a negative meaning related to danger, damage, loss or loss. However, risk is an inevitable part of decision-making processes in general and investment processes in particular.

Also associated with insecurity, doubt or insufficient knowledge that to a greater or lesser degree surrounds the economic events and their results, as well as the affectation and undesirable nature of some of the effects derived from them, constitute the basis for the existence of risk. Several authors have tried to define the term analyzed. In Table # 1 some of these definitions are listed in chronological order, highlighting that the omission of other responds to how extensive result treatment since, in general, it is considered that the omitted consulted are similar in essence to that have been included.

Authors	Year	Concepts
García Soldevilla, Emilio	1990	Understands the concept of risk as a qualitative factor that describes a certain degree of uncertainty about the future results of the investment. He also conceptualizes it as "situations where probability can be applied to future outcomes."
Cooper & Chapman	1994	Risk is the exposure to the possibility of economic and financial losses, damage to things and people or other damages as a consequence of the uncertainty caused by carrying out an action.
Cuban School of Insurance	nineteen ninety five	Possibility of an event occurring by chance that produces a patrimonial need. That is, it is stated that a risk is borne when the consequences of the occurrence of an event foreseen as possible are suffered.
Saavedras, Casa Gabriel	1997	Risk is the possibility that an event or action could adversely affect the organization.
Central Bank of Cuba	1997	Contingency or eventuality of damage or loss as a consequence of any kind of activity and whose assurance, when possible, may be the subject of a contract
Philippe Jorion	1999	Volatility of expected financial flows, generally derived from the value of assets or liabilities.
Portillo Tarragona	2001	It expresses that the risk is the existence of scenarios with the possibility of loss and loss, obtaining a return below that expected. In this way, it is quite common to associate risk with variability of returns, in its different meanings, so that there will be as many types of risk as returns.
National university of Colombia	2001	Possibility of occurrence of a situation that may hinder the normal development of the entity's functions and prevent it from achieving its objectives.
Marino Rodríguez, Frías C & Souquetc	2002	Probability that the prices of the assets held in a portfolio will move adversely due to changes in the macroeconomic variables that determine them.
From the source	2003	Risk is the uncertainty about a future event associated with both a favorable result and an adverse result. From the point of view of financial analysis, the interest is to observe those events that, as a result of uncertainty, produce losses to an institution.
National university of Colombia	2004	Risk is a measure of uncertainty that reflects present or future events that can cause a break in the flow of information or failure to achieve organizational objectives.
Source: self made.

The various definitions of existing risk show that it is adapted according to the activity for which the economic entities are exposed, understood from different points of view, such as:

In Economics: Set of difficulties and dangers that the entrepreneur must face in order to obtain benefits in his activity or the probability of not obtaining the expected and desired result.

For Financial Institutions: The risk appears when the entity assumes, through intermediation, the responsibility of fulfilling its obligations with savers and investors, which will largely depend on the repayment on time and in the form of the bank's debtors. Risk assumed when financing third parties.

For the Financial Market: The risk allocation of a specific financial asset with respect to the risk of a diversified portfolio depends on how the yield of that security reacts to a general rise or fall of the entire market.

In consequence of the above, it is considered that the concepts addressed by the aforementioned authors are valid, highlighting relevant aspects such as:

Risk is associated with uncertainties derived from actions. They constitute the bases for the existence of risk, insecurity, doubt, insufficient knowledge and losses. It refers to the possibility of loss, the degree of probability of loss and the amount of possible Loss: In the financial sphere, risk should be understood as the degree of uncertainty of expected returns in the future. Uncertainty - risk relationship.

When making decisions, all managers must weigh alternatives, many of which involve future events that are difficult to predict: a competitor's reaction to a new price list, interest rates three years from now, reliability of a new supplier. For this reason, decision-making situations are considered within a continuous line that goes from certainty (highly predictable) to turbulence (highly unpredictable). Fig. # 1.2.

Fig. # 1.2: Continuous line on the situations that arise in decision making.

Source: Administration, James Stoner, 1990

Under the conditions of certainty, we know our objective and we have accurate, measured and reliable information about the result of each of the alternatives that we consider. A decision-making carried out by the administrator under conditions of certainty, leads to others of risk, uncertainty and even turbulence.

On many occasions the term "risk" is used interchangeably with "uncertainty", but they do not mean the same thing. We speak of risk, when the probabilities of the possible results of the investment are known; and uncertainty when it is not possible to determine such probabilities. Thus, the difference between risk and uncertainty lies in the decision-maker's knowledge of the probabilities, or possibilities, that the expected results will be obtained.

In other words, risk occurs whenever the outcome of an alternative cannot be predicted with certainty, but there is enough information to foresee the probability that it will lead to a desired state of affairs. Under conditions of uncertainty, little is known about the alternatives or their results, that is, the decision maker does not have enough information to determine the probabilities of the possible events to occur, being forced to speculate in order to assign the different results a subjective probability.

Therefore, risk and uncertainty are essential conditions for decision-making in which managers know the probability that a specific alternative will lead to the achievement of a goal or desired result (risk); and on the other hand, they face unpredictable external conditions or when they lack the necessary information to establish the probability of certain events (uncertainty). For the Russian economists G. Goldstein and A. Gutz, the bottom line in risk is uncertainty. According to them, the risk is “the uncertainty regarding the potential for losses in the process of achieving the company's objectives”.

On the other hand, and this should be clear, taking a risk requires getting something in return. No entrepreneur will take risks without compensation. Hence, there is an inextricable relationship between risk and return in most of the financial decisions of an entity. The usual association between them will be positive, that is, the higher the risk, the higher the expected return, and vice versa. This relationship is present in all business decisions to the extent that its objective is always inextricably linked to obtaining certain levels of profitability and maximizing the value of the company for its owner.

In search of higher returns, companies open up to international financial markets, where "certainty" or "zero risk" is currently non-existent in practice, finding themselves in situations with a higher or lower level of risk. That is, in order to achieve business objectives, these entities face an environment strongly affected by different types of risks, which are associated, in each alternative chosen, with an expected return.

Business Risk.

Although some differences appear in the details, in most definitions business risk is interpreted in the space of categories such as uncertainty, probabilities, alternatives, losses. In some studies on the subject of risk, “the impediment, the obstacle, the threat, the problem” is highlighted as decisive, which casts doubt on the scope of business objectives.

Business risk is based on the probabalistic nature of business activity, as well as the relative situational uncertainty in which this activity takes place. The work in the framework of the market economy is mostly carried out for purposes determined on the basis of what is predicted and desired, the performance of which depends on the interplay of many internal and external factors of the economic organization. In this way, business activity is necessarily accompanied by a dose of uncertainty (Frank Knight: uncertainty as “randomness with known probabilities”) that predetermines the need to choose between different alternatives and to make decisions in a situation of incomplete information. Where there is no room for choice there is no possibility of risk.Risk presupposes making decisions and assuming their consequences. Carrying out one of the possible alternatives (Herbert A. Simon: “the satisfactory alternative”) the entrepreneur always runs the risk of achieving results that do not correspond to the previous objectives.

Reflecting the aforementioned characteristics, Business Risk could be defined as a: “Subjective-objective phenomenon of the decision-making process between different alternatives in a situation of uncertainty, with the probability of causing negative effects on the objectives of the company, producing after the action decided a worse result than expected ”.

In this way, risk is presented as a complex phenomenon, of an objective and subjective nature that includes:

The situation of uncertainty as a context and objective condition of risk The act of making decisions based on incomplete information. The experience of hesitation motivated by the probability of losses or failures as a result of the realization of the privileged alternative.

In part the risk is "situation", because there are no risks where there is no uncertainty, but it is not only the uncertain situation because there can be uncertainty without risk. It is a decision-making process, because there are no risks where different options are not presented and preference is not assigned to one of them. But the risk is something else - it presupposes the situation of feeling compelled to make resolutions and execute them knowing in advance that their consequences carry the probability of considerable losses. It is something objective, which does not depend on the will and desire of the entrepreneur, but it is also in part a particular experience - the experience of doubt, the feeling that accompanies gambling, the enthusiasm of hope together with suspicion for the potential failure.The expression "taking risks" is perfect, giving the expression of the double face of risk - it means both the process and its internalization, it enunciates the objective and at the same time subjective nature of risk.

Business risk is universal in nature - it could manifest itself and affect all stages and sectors of an economic organization, all business activities carry risk. For this reason, for the purposes of its management, it is necessary to classify the risks. In this endeavor, various orientations have been carried out.

Typology of risks for the Company.

Uncertainty is a double-edged sword: it equally creates risks and opportunities, with positive or negative effects on the company. They concern both the economic situation and the financial means, which forces organizations to seek solidity in their financial structure and the necessary flexibility to adapt to an increasingly changing environment. Capitals move from one country to another not only trying to obtain better returns, but also in search of greater security.

A financial decision involves risks of different types through the operations carried out by any entity, for example: when importing, exchange risk is present; when exporting, the exchange rate and credit; when investing, the exchange rate, the credit rate, the interest rate, the country risk, among others. When making a general classification of risk, criteria from different authors were taken into account, which were grouped as follows:

Fig. # 1.3: General Risk Classification.

Source: Approximately to: William G. Nickels, James M. McHugh, and Susan M. McHugh. (1997), Jorion P. (1999).

According to Jorion P. (1999), companies are exposed to three types of risks: business, strategic and financial.

Business risks are those that companies are willing to take to create competitive advantages and add value for shareholders. They have to do with the market of the product in which the company operates and includes technological innovations, product design and marketing. Operating leverage, related to the level of fixed costs and the level of variable costs, is also largely an optional variable. In any business activity, rational exposure to this type of risk is considered an internal ability or competitive advantage of the company itself.

For their part, strategic risks are those resulting from fundamental changes in the economy or in the political environment. These risks can hardly be hedged, except for diversification through different lines of business and different countries.

The financial risks: risk of not being able to cover the financial costs. Related to the dynamics of change and possible losses in financial markets, movements in financial variables such as interest rates and exchange rates, constitute an important source of risks for most companies. It refers to the eventualities that can affect the profit or net profit of the company. For example, the increase in fixed charges that involves having to periodically pay interest and principal, increases the risk of insolvency in addition to leading to greater fluctuations in the profit available to entrepreneurs.

Taking into account that the object of study of this work is precisely the financial risks, the conformation of the same will be explained in detail.

Classification of Financial Risks.

The company assumes various financial risks in the performance of its activity, and their increase will depend on the degree of future uncertainty and the company's exposure to said risk. The treasuries of companies have evolved towards a substantial transformation in comprehensive risk management, which requires them to carefully manage cash flows and protect assets and profits with greater sensitivity towards financial risk. Within the business framework, exposures to strategic, business and financial risk are substantially interlinked. A more disaggregated criterion would yield the following categories of financial risks: (Table # 1.1).

Table # 1.1: Different types of financial risks.

Financial Risk Categories

1. Market risk

2. Credit risk

3. Liquidity risk

4. Operational Risk

5. Country risk

6. Interest rate risk

7. Currency risk

8. Legal risk

Source: In approximation to various authors: (Park, S., 1997; Jorion P, 1999; Portillo Tarragona, 2001; Soldevilla E. 1996)

Which will be addressed taking into account assessments of various authors.

Market or systematic risks: Taking into account the study carried out of the term, Market Risk is understood as the loss that an investor may suffer due to the difference in the prices that are registered in the market or in movements of the so-called factors of risk (interest rates, exchange rates, etc.). We could also define it more formally as the possibility that the net present value of a portfolio moves adversely, due to changes in the macroeconomic variables that determine the price of the instruments that make up a portfolio of securities.
1. Credit or insolvency risks: Through the variety of criteria exposed, we can define it as the potential loss that is the consequence of a default by the counterparty in an operation that includes a payment commitment. It is also known as bad debt risk, as it refers to the creditworthiness of the borrower. It also includes the “prolonged default” of certain cases of entities that in practice imply the same for the borrower.

For the debtor company it is also necessary to know its real and potential credit classification, because when requesting a loan it must take into account the quality of the guarantees it has granted and which will be those that it can grant in the present and future. Related to this risk, there are internationally recognized entities that, based on a set of indicators, classify credit risk, assigning entities a specific rating.

When mixed with country risk; But from a political risk point of view (related to the will to fulfill an obligation), the objective analysis becomes more complex, especially if it is done from the perspective of the investment made by foreign companies in the country. As its systematization is so difficult, in most of the analyzes the economic aspect predominates, by far, fundamentally if it is about estimating the probability that a given country will have difficulties in servicing the external debt or that it needs to renegotiate the conditions of payment. the same. It is very important to note that the basic criterion for valuation is its ability to pay and not the guarantees it can offer, which always perform a subsidiary function.

Liquidity risk: Consequently, the liquidity risk derives from the fact that a company's payments and collections do not coincide either in volume or in periodicity, which can generate a cash surplus or deficit. An entity's liquidity risk will be greater as long as its short-term liquid assets are less than its obligations in the same period. Even when an entity is solvent, a temporary lack of adequacy between the existence of liquid or almost liquid assets and immediate obligations can create a situation of lack of liquidity, and with it the impossibility of satisfying its obligations, due to not being able to cover with them, or through their transformation into money, the present obligations. The relationship between an entity's short-term obligations and its liquid, or near-liquid assets,it will allow to calculate the short-term financial health of the same.Operational Risk: It is related to the losses that a company or institution may incur due to the eventual resignation of an employee or official of the same, who during the period that he worked in said company, concentrated all the specialized knowledge in some key process. In addition to including the possibility of loss caused by failures of internal control systems. In other words, due to the probability that the established controls fail to prevent, detect and correct in a timely manner, errors that occur in transactions. Risk country:We can relate it to the loss that could be suffered in the event that there is a breach of a counterparty and in that transaction it could not be demanded by legal means, to comply with the payment commitments. It refers to operations that have some error of legal interpretation or some omission in the documentation. It comprises three types of interrelated risk: political risk, administrative risk and sovereign risk.

Interest Rate Risk: The various definitions of the term in question refer to the possibility of future losses in the balance sheet as a whole, as a consequence of the different maturity of active, passive and off-balance sheet operations, in the event of adverse movements in the rate. of interest. Foreign exchange or exchange rate risk: In general, it affects the competitive position of the company vis-à-vis its rivals, be it in its domestic market or in international markets, although it is more evident in the latter. It is the best known and most visible of corporate financial risks due to the ease with which its consequences are measured.We can state that this type of risk is presented as a consequence of fluctuations in the prices of currencies in the foreign exchange markets as a result of supply and demand, and can be defined as the variability of the equity situation and profitability based on of the fluctuations of the exchange rates of the currencies with respect to the position in which they are, especially for the credits, debts and deferred values.

Knowing the short and medium-term forecasts of the behavior of the exchange rates between the fundamental currencies will allow reducing the risk in transactions. In addition, there are financial instruments for hedging risks, such as futures, options, forwards, swaps, among others. By the way, these mechanisms can also be used to hedge against other types of risks, for example interest.

Exposure to exchange risk appears linked to a large number of operations such as exports, imports, foreign currency loans, direct investments abroad, etc. In turn, such exposure can originate in various ways that, in short, could be classified into three categories: Translation (accounting) exposure, also known as conversion, Transaction exposure and Economic exposure.

Legal risk: We can formulate the following definition of legal risk, specifying that it can be generated through changes in the laws and regulations that govern the world, losses that could be suffered in the event of a breach of a counterparty in which the fulfillment of the payment commitment in the transaction is not required by legal means. It refers to operations that have some error of legal interpretation or some omission of the documentation.
- Although only one set of risks has been listed within the existing ones, it is important to point out that in this work attention has been paid to credit risk, as it is one of the most manifested in the transactions carried out by service companies. (Hotels)

Risk Management as part of the management process

The three analytical pillars in today's finance theory are: time value of money, asset valuation, and risk management.

Companies are in the business of risk management. The most competent get it, others fail. While some passively bear financial risks, others attempt to create a competitive advantage through judicious exposure to these types of risks. In both cases, however, risks should be carefully watched as they signify a high potential for significant financial losses, increasingly faced with factors that create insecurity.

Risk management is a systematic approach to help organizations, regardless of their size or mission, to identify events, measure, prioritize and respond to the risks that affect projects and initiatives underway, allowing it to determine what level of risks you can or want to accept, while building your future. These entities have the mission of offering society a product or service, for which it has to use a series of resources and assume a set of risks, manage them effectively and obtain a benefit.

The term Risk Management , Risk Management or simply Risk Management , is widely used in these times, especially in relation to accidental losses of the organization. In this research the term Risk Management will be used.

Risk Management is an advanced technology, of relevant importance for the development of managerial activity in general. Its benefits have been satisfactorily demonstrated, allowing economic technical results of significant value. It is typical of developed economies and seeks the approach to excellence in business management.

Thus, Risk Management is a fundamental part of the strategy and decision-making process in the company and, therefore, has to contribute to the creation of value at all levels, not only for the shareholder but also for other groups such as clients, holders of rights over the company (lenders, state, management, creditors, employees in general, etc.) and for other entities that serve the above groups and society in general (financial analysts, potential investors, agencies credit rating agencies and regulatory bodies among others.) The creation of value for these groups translates into value for shareholders in the medium term, increasing profits and the price of their shares.

As a continuous process, it requires organizations to develop policies, methods and infrastructures, where the information it provides is one of the keys and the fundamental starting point to make the right decisions. It is essential that senior management lead the risk management process from its implementation to the demand for control and evaluation under profitability criteria of all decisions made, starting with those of strategic importance.

Among the advantages that it provides to organizations we have: 1) It facilitates the achievement of the organization's objectives, 2) It makes organizations safer and aware of their risks, 3) Continuous improvement of the Internal Control System, 4) Optimizes the allocation of resources, 5) Taking advantage of business opportunities, 6) Strengthening the culture of self-control and 7) Greater stability in the face of changes in the environment.

7. Financial Risk Management.

"Risk Management" is not limited to one event or circumstance. It is a dynamic process that unfolds over time and permeates every aspect of the organization's resources and operations. It involves people at all levels and requires viewing the entire organization as a portfolio of risks. Thus we see that it occupies a place and takes on a strong importance within the broader definition of Business Administration, since its function is to minimize the negative impact of losses on the organization.

In modern life, more important than acting on the consequences that the occurrence of risks causes, is to consider and study in a timely manner the causes that give rise to this occurrence and to act professionally in a preventive way on them to avoid and / or minimize losses economic in the organization.

Within the framework of this research, we coincide with Wilches Chaux, (1998), by defining Risk Management as «the decision-making process based on the expectation of future benefits, weighing the possibilities of unexpected losses, controlling the implementation of practice of decisions and evaluate the results in a homogeneous and adjusted way according to the position assumed «.

This definition implies that it is a dynamic process, which constitutes a means to an end and not an end in itself, executed by the entire organization, whose implementation provides non-absolute security in that the handling of certain events does not affect to the performance and achievement of business objectives.

If the business risks are mainly decisions, events or processes, executed (or omitted) in a situation of uncertainty, which potentially / probably cause results in the form of losses or profits for the company; its management must be the set of activities that pursue the double objective - both to protect the company and to exploit profit opportunities offered by risks. Generally speaking, risk management is the art of oscillating between profit and loss. In this way, the following characteristics can be stated:

General Characteristics of Risk Management

Dynamic character; because it is constituted as the inherent part of the general management of the company that predicts the occurrence of risk events, analyzes and addresses them to mitigate them or to calculate and guarantee advantages of acceptable risks. It is guided by the principle " maximum profitability for each level of risk. ”It has to be carried out as a continuous activity, which forges, plans, organizes and controls the entire process from the moment of gathering the information and developing the risk policy, to the monitoring and communication of the results after exercising this policy. Integral character; It involves all levels and sectors of the business institution Risk management encompasses two dimensions:structural and procedural. (Annex # 12)

As previously stated, Risk Management within a company or institution generally obeys three main types: 1) Business or Operational Risks; 2) Strategic Risks and 3) Financial Risks.

The Financial Risk Management meanwhile, is a specialized branch of corporate finance, which is dedicated to handling or coverage of financial risks. When defining this technique, we used the criteria of various specialists; so we must state it as: "The process of planning, organization, integration, direction and control of financial resources and activities of an organization, to minimize the economic effects of accidental losses and business, with the lowest possible cost and with the purpose of improving organizational decision making. "

Meanwhile, the financial encyclopedias consulted suggest that it is nothing more than a management system that tries to preserve assets and obtain a situation of control over a business, counteracting the risks of possible losses. Applicable to any situation where an unwanted or unexpected result may be significant or where opportunities are identified.

Then it must be recognized that risk management, be it financial, business or strategic, involves activities that in one way or another carry out any well-managed company, since:

The board and senior management decide which businesses they want to be in and with which strategy. In the budgeting processes, the expected benefits of each business are estimated with the intervention of their managers and the accounting or management control department. Business units make their decisions taking into account the chances of success and the costs of failure, albeit subjectively. The results of these efforts are measured a posteriori by the Accounting department, comparing with the budget, analyzing the differences and calculating the return on equity for each business unit. Internal and external auditors verify the value of the operations carried out, thus controlling the performance of the managers.

To the extent that each and every one of the decisions is made within the framework of risk management and taking into account the speed and enormous volume with which companies operate, an information and management system with speed of response is essential far superior to that of budgeting processes and preparation of financial statements. The losses that are avoided thereby far exceed the material and human investments required to carry out risk management.

Risk management is considered to reduce costs for companies (bankruptcy, debt, tax, illiquidity and underutilization of available capital), which translates into higher expected flows for shareholders without increased risk and therefore in the creation of value for the shareholder, which allows to conclude that:

Any well-run company manages its risks, but the necessary investments must be made so that such management is systematic, objective and homogeneous. Much of the financial risk management must be carried out within the company and not by investors, especially when the Managers have more information about the company's positions at all times (which almost always happens.) Integrated management of all risks within the company can contribute to the creation of shareholder value by optimizing the risk-return ratio (achieving the adequate use of available capital) and reducing costs.Adequate risk management should serve to maintain or improve the level of external credit rating as well as facilitate operations with other companies that assume a credit risk with the entity.Risk management helps to demonstrate to regulators and inspectors the ability to develop the business, safeguarding the interests of third parties.

In short, risk management involves:

Avoid risk when possible, and whenever significant losses can be generated Control risk when it cannot be totally avoided, in order to minimize potential losses Tolerate risk when movements tend to be more favorable than adverse, assuming them with capacity own in exchange for "enjoying" the inherent return opportunities.

Risk Management Process.

When faced with risk management, three questions must be asked, which find answers in the execution of the study. These are:

What can go wrong, what can be done, how to maintain continuity?

The search for active and timely actions for each of these questions, lead to the execution of the central tasks that are listed below:

The identification, evaluation of the risks and the establishment of the necessary regulations: Its objective is to identify all the potential risks, which can have a negative impact on the system. Establish regulations that allow avoiding them or lessening their effects, if they cannot be avoided because they are eminently fortuitous. Loss control:It takes into consideration the monitoring of the project in a comprehensive way, allowing not only preventive control, but also operational control in the technical-economic order, ensuring that there are support programs that increase confidence in the exploitation of the project, achieving a high level of quality based on the assurance of constant training of human resources, as well as that there are alternatives that allow, in the event of interruptions, that the recovery time is minimal. Risk financing: It tries to avoid that the occurrence of a risk leads to the generation of an economic loss, that is, that the financial recovery alternative is foreseen for the entity, based on an effective transfer of risk, either by contractual means or by that of commercial insurance.

Everything that is done in terms of risk management is essential for the correct definition and implementation of the company's strategy and the future development of the business. Although the participation of all strata of the organization is required, it is essential to create a differentiated function in this activity that supports senior management and the relevant units and that guarantees:

Efficient relationship between profitability and risk. That the level of risk assumed is in accordance with the solvency objective (desired credit quality) and with the limits defined by the governing bodies of the company.

Among experts in the field there is no unanimity in the segmentation of the risk management process. The general considerations of studies carried out on the risk management process are summarized below.

Table # 1.2: Risk Management Process according to studies carried out.

Source of information	Risk Management Process
Study on "Business risk management: a comprehensive framework" (2004)	1. Analyze the internal environment 2. Define the objectives 3. Identify events. 4. Assess the risks. 5. Respond to risks. 6. Control activities. 7. Gather Information 8. Exchange communication.
Seventh Global CEO Survey, Pricewaterhouse Coopers.	1. Risk identification. 2. Risk assessment. 3. Agreed response models. 4. Risk control activities. 5. Risk surveillance activities. 6. Regulatory compliance processes.
Jorg Greitenmeyer, German economist	1. Identification 2. Analysis 3. Communication 4. Control 5. Documentation.
Source: Own elaboration based on Bratoy Koprinarov, 2005

The remarkable thing is that in the three mentioned studies (Table # 1.2) the criterion of dividing the risk management process into phases or stages is not defined. It seems to us that such a criterion could be the nature of the activities involved in one or another of the moments of the process. From this point of view and in order to carry out a correct management of financial risk; The following phases or stages must be taken into account:

Study Phase: involves three activities that are very similar to each other: identification, analysis and risk assessment.

Risk identification: It is the process that a company uses to identify risk exposure (of its assets, responsibilities and human resources) in a systematic, continuous and conscious way as soon as it arises or even earlier. It assumes:
1. Scan the internal and external environment for signs and trends that could expose the company to risk Establish threats and / or opportunities and determine the likelihood of their impact on the operation and objectives of the company.
  - Risk analysis: Cognitive process in which the profile of each of the risks is elaborated, then their correlations and the frequency of their appearance are examined. It is important to note that while the impact of a single event may be minimal, a sequence of events can amplify its significance. Tasks are carried out such as establishing possible alternatives, elaborating scenarios for the development of the alternatives and aligning them with the objectives of the company. Risk assessment: It is the quantification of risk exposures, which will have financial implications. It is oriented to:
    1. Measure the level of probable damages and the cost of the measures to avoid / reduce them Examine the capacities and resources available to the company to face the risks identified, systematized and evaluated Design the program for the implementation of instruments and measures to deal with threats Prepare the contingency plan.

It is to determine the relative importance of risks within the financial structure of the company, as well as obtaining information to decide the best combination of risk management tools. In this activity it is necessary to relate its two main parameters: frequency (probability) and severity (volume), which influence to make a correct decision (Annex # 14)

The higher the frequency, the greater the risk. The greater the severity, the more dangerous the risk.

Implementation phase: covers the implementation of risk response instruments or techniques. They are operations dedicated to exerting influence in order to achieve parameters, which are aligned with the specific goals of the company and thus convert risks into “acceptable risks”. Risk management experts identify five main risk control operations: elimination or avoidance, prevention, reduction, retention, and transfer.
1. Elimination or avoidance of risk: It is the managerial activity in which it is tried to reduce risk through redesign of the company's plan. To eliminate a risk, one must act in such a way that an exposure to loss is not created, or that any existing exposure is completely eliminated, reducing the probability of loss to zero. Risk avoidance is about not exposing yourself to a certain risk. This reduces the threats of losing but also the chances of winning. Prevention: It is any measure that is taken to reduce the probability of a loss or frequency. All possibility of loss is not eliminated as elimination does. Prevention looks at the causes of losses and is an action that is taken before a loss occurs.Risk reduction: Oriented towards limiting the possibilities and serious consequences or both of a risk. It seeks to reduce the severity of losses. To analyze opportunities in the area of risk reduction, the risk manager must assume that a loss has occurred and ask what could have been done (sooner or later) to reduce the size or "severity" of the loss. Risk retention: Absorb risk and cover losses with your own resources. It consists of the set of activities, especially of a financial nature, carried out by the company to directly compensate the possible losses that may occur. Risk transfer:Set of procedures whose objective is to eliminate risk by transferring it from one place to another or from one group to another, either by selling the doubtful asset or insuring the activity with potential risk. It is important to emphasize the importance of the risk transfer method, since today it is the most used method in risk management, in turn, it makes use of derivative instruments. This operation has three dimensions, that of protection or coverage, that of insurance and diversification.
Control Phase: it gives a main role to the monitoring, control and communication processes within the framework of the company, which is exposed to risks.
1. Monitoring: It is mandatory for the proper functioning of risk management; where a system of measurement and monitoring mechanisms must be designed and implemented for activities exposed to risks. Control System: Its task is the systematization of monitoring data, especially the results of the observation of risk factors. Communication: An indispensable instrument for disseminating information on threats and risk factors to all company personnel.

For a better understanding of this whole process, it is illustrated below.

Financial Risk Management Process

Source: in an approach to B. Koprinarov in: "Business risk and its management". www.analitica.com/va/economia Oct 2005

Business Risk control flow chart, an integrated approach.

Source: Approximately to: Koprinarov Bratoy in: Business Risk and its management (2005) and in Risk Management (2001), available at:

http: // www.RecoletosCondamientos.com

Partial Conclusions

In recent times, more people are interested in the subject of business risk and, as never before, the need arises to develop theoretically and effectively implement risk management in all economic activities, thus, when the diversity and complexity of risks, it is an imperative for the business world to develop awareness of risk and to advance in practical methods to face it, although it is true that a wide range of business people and ordinary people are condemned to live with it. risk and take adequate daily measures for its prevention, it is necessary to deepen the studies of risk management as well as widely disseminate its results.Risk management implies avoiding and controlling risk, in order to minimize potential losses,as well as tolerate it as long as the movements tend more to be favorable than adverse, assuming them with their own capacity in exchange for "enjoying" the inherent opportunities for return. Although only a set of risks has been listed within the existing ones, it is important It should be noted that in this work attention has been paid to credit risk, as it is one of the most manifested in the transactions carried out by service companies. (hotels) Internationally it is recognized that managing only by financial indicators is suicide; However, it is known that the determination of financial ratios are common in the analyzes made by accountants, financiers and personnel of the economy in general, from the information contained in the Financial Statements, which together with other indicators,They constitute a starting point for analysis and decision-making, at least in those entities that, due to their characteristics, are required to do so.

Currently, there are no known publications, or studies carried out, that consider financial risk management as a process that goes from identification to control, where methodologies, techniques and / or processes widely used in the modern world are used.

BCC (1997): "Glossary of terms", in Finance and banks course for entrepreneurs; CD, Havana.

According to Portillo Tarragona, Mª Pilar (2001): “Financial Risk Management: Interest rates, 5campus.com, Financial Management:

Conference # 8: Aspects related to risk assessment guidelines. Virtual course given by the National University of Colombia on Internal Control and Management Control, available at: http://www.virtual.unal.edu.co, March 2005

Virtual course given by the National University of Colombia on Internal Control and Management Control, available at: http://www.virtual.unal.edu.co, March 2005

It refers to the prolonged delay in payment by the client, which can be indefinite for reasons of government strategy or derived from bureaucratic processes.

The rating is nothing more than an indicator that aims to express the capacity or probability of payment in the precise time of both the interest and the principal that all the debt carries, that is, the greater or lesser credit risk that the investor who has lent bears your funds to the entity that receives them.

In a credit institution, for example, insolvency may arise as a consequence of the mismatch between assets and liabilities, a significant decrease in income, or an unforeseen growth in financial investments.

The political risk depends on the likelihood of expropriation or nationalization of the private sector (mainly foreign - owned segment) with or without compensation.

The administrative risk is associated with the implications of government actions in the economic freedom of the private sector in general and foreign subsidiaries in particular (restrictions on factor mobility, to the functioning of markets, exchange control, pricing, barriers to the foreign trade, etc.)

The sovereign risk is assumed by international lenders in their credit operations with public institutions and nation states. Within the latter, the following are distinguished: the properly sovereign risk ( associated with the difficulty of seizing assets of a country in order to collect debts from it, the sovereign risk, is that of the creditors of the States or entities guaranteed by them, insofar as legal actions against the borrower or the last one obligated to pay for sovereignty reasons may be ineffective. ) and the risk of transfer (Derived from the impossibility for a nation to pay its international debt due to insufficient foreign exchange generation, that is to say. Transfer risk, is that of the creditors of residents of a country that experiences a general inability to meet their debts, due to lack of currency, or currencies in which they are denominated, or for reasons of inconvertibility. )

Exposure to currency risk occurs during the time between the moment a position is taken in a currency (for commercial or financial reasons) and the moment it is liquidated. Example: The danger lies in obtaining loans in one currency and granting loans in another, or having collections in one currency and payments in another. Unwanted changes in exchange rates would affect expected performance.

It is linked to the direct investments of multinational groups abroad. It derives from the need to standardize the financial statements, expressed in the currency of the parent company, to proceed with their consolidation and final presentation. These differences carry risk of translation. It arises from the translation of financial statements in foreign currency to the currency of the parent company for the purpose of financial reports

It is related to operations carried out in foreign currency not yet due. In other words, the amount of future cash receipts and payments will depend on the exchange rate at the time they are produced and valued. Associated with the individual transaction denominated in foreign currency: imports, exports, foreign capital and loans

Expected variations in the exchange rate can be neutralized by the market and by efficient management of exchange risk in the company. Consequently, under this approach, foreign exchange risk management must focus on measuring future cash flows exposed to unexpected variations in the exchange rate. Associated with the loss of competitive advantage due to exchange rate movements.

Different terms are used to conceptualize the term administration - such as: direction, management and / or management - without appreciating significant differences in its essence and content, although De Miguel Fernández (1991, p. 44) establishes them when considering that: … ”Management is an executive function and is the management or administration carried out by the managers”. His study has been framed in various ways, where operations as a system and hierarchical, functional, behavioral and decision-making approaches tend to predominate. (Maynard, 1968 and 1984; Voris, 1970; Buffa & Newman, 1984; Tersine, 1985; Koontz, 1990; Fernández Sánchez, 1993; Cuervo, 1994; Monks, 1994; Gaiither / Frazier, 2000; Krajewski & Ritzman, 2000; Chase et al., 2001; Medina León & Nogueira Rivera, 2001)

PWC (1999): "Chief Financial Officer, architect of the future of the company", Madrid Page 16.

The term Risk Management Process is also valid to state it as phases or stages of Risk Management.

The identification of risks is a very complex type of intellectual work, because it brings together in itself the use of knowledge of economics and organizations, of the strategic objectives of the company and of the business partners.

It is the number of losses that occurred in "X" time. Ex: losses in a year, lost in a budget period. While in the future it is described as the probability of an event occurring.

The size of each loss.

Risk diversification is the way of trying to spread risk from a single area / asset to multiple assets (targeting new markets and suppliers, diversifying the list of services) in order to prevent loss of everything. Generally, a company carries out risk diversification through weakening its dependence on dubious suppliers, from submitting to a single product.

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