There are many components of successful model risk management. When managing risk, it is important to be aware of the different types of FP&A (Financial Planning and Analysis) risk classifications that exist. Utilizing these classifications can help you identify and manage model risk more effectively. Let’s dive in and explore the different types of FP&A risk classifications.
Growth Risk Classification
The first type of FP&A risk classification is growth risk. This is defined as the likelihood that a business will not reach its goals due to external factors such as economic recession, competition, or other unforeseen events. For example, if your company has a goal to grow by 20%, but the economy experiences a recession, your growth could be significantly impacted, resulting in an inability to meet your goal. It is important to understand growth risks and formulate plans on how best to mitigate them if they occur.
Market Risk Classification
The second type of FP&A risk classification is market risk. Market risk refers to any risks related to fluctuations in market prices or values of assets held by a company. This includes things like changes in interest rates, stock prices, currency exchange rates, or commodity prices. Companies should have measures in place that allow them to monitor their exposure to market risk so that any potential losses can be minimized.
Operational Risk Classification
The third type of FP&A risk classification is operational risk. Operational risks are those associated with internal processes and operations within an organization such as inadequate controls over operations or technology failures. Examples include errors made by employees during data entry or cyber-attacks on systems used by the organization. It is essential that organizations identify any potential operational risks they face and develop strategies for responding quickly and efficiently when they occur.
FP&A (Financial Planning & Analysis) Risk Classifications are important tools for identifying and mitigating model risk effectively within an organization. There are three types of classifications: growth risks, market risks, and operational risks. Understanding each type of classification can help organizations create plans for responding quickly when risks arise so that potential losses can be minimized or avoided altogether. With proper identification and management of FP&A Risk Classifications, organizations will be better prepared for whatever comes their way.
