Financial Analysis & Risk Management
- Financial analysis activities serve three purposes. First, they help managers ensure that internal controls, policies and procedures around financial reporting mechanisms are functional. Second, they help management evaluate operating data and accounting information and then aid in verifying that financial statements are complete. Complete financial statements include a balance sheet, a statement of profit and loss, a statement of cash flows and a statement of retained earnings. Third, financial analysis activities help management evaluate business performance.
- A financial analyst reviews current and historical data, evaluates operating performance ratios (for example, profit margins and sales revenues) and then helps top management make decisions. According to the Bureau of Labor Statistics, annual wages, excluding bonuses, of financial analysts were $73,150 in 2008, with the lowest 10 percent earning less than $43,440 and the highest 10 percent earning more than $141,070. A financial analyst typically holds a four-year college degree in finance, accounting, tax or auditing.
- Risk management is a business activity that helps a corporation's top management reduce losses inherent in operations. A company typically establishes controls, policies and guidelines to manage risks, and then ensures that those controls comply with regulatory guidelines, industry practices and corporate policies. A control is a set of instructions that senior managers put into place to avoid (or limit) losses. A risk may be due to human error or technology malfunction. A risk also may relate to financial activities (for example, market and credit risks).
- A risk manager is a mathematical expert who applies complex statistical tools and methodologies to identify, appraise and monitor market and credit risks inherent in a bank's transactions. A risk manager also may ensure that internal controls are functional, adequate and in compliance with corporate operational and compliance risk management policies. According to the U.S. Labor Department, median wages, excluding annual bonuses and stock options, of risk managers were $99,330 in 2008. A risk manager typically holds a master's degree in math or a business field.
- Financial analysis and risk management functions are separate, but there may be situations where they interrelate. Let's say Bank A.B.C. just purchased Bank C.A.F., a small California-based savings institution. Bank A.B.C.'s top management may ask financial analysts and risk managers to form a working group, analyze Bank C.A.F's financial results and then provide risk management solutions to prevent further losses in Bank C.A.F.'s operations.