Finance and Sustainability Risk
This week the student was reading up on finance and sustainability-type issues and thought that he would talk to his professor about these risks.
Finance Risks
Starting with finance risk the professor introduced the circular movement of money concept to illustrate how finance works and the risks involved. He said every organisation needs money. Normally, the money initially comes from the owners. It would then be spent, and then sales made and then sales revenue would be received and then banked - ready to be used to pay expenses, hence the name “circular movement of money”.
If there is insufficient money, then the business needs to borrow. The professor said that to start a business one needs to put money into the bank account or borrow it. If the money is given to the business, no income or capital repayments are required unless there is an agreement to do so. However, when borrowing from the bank you normally need to pay regular interest and capital payments. He pointed out that borrowing from banks in times of economic uncertainty can be risky.
Examples of Financial Risk
The professor gave examples of typical financial risks in the education industry. The first is changes to government policy may reduce applications and enrolments from international students. He said that one way to overcome this is to have a diverse set of students, domestic as well as international. With international students, care must be taken not to focus and take large numbers of students from one country only, because if there is an issue between the governments of the two countries, this could result in a large drop in enrolments and a reduction in fee income.
He then spoke about liquidity risk, which is insufficient operating surpluses or cash reserves to make future financial commitments. Here one needs to clearly manage cash flows in a judicious way, requiring forecasts to be prepared and adhered to, including ongoing cash flow planning combined with working capital optimisation. A key mitigation strategy is the maintenance of a liquidity buffer.
The last risk that he spoke about was fraud, or misappropriation, risk. Care is required as much money can be lost here. To mitigate against this risk the organisation needs to have good internal controls including delegating authorities, separation of duties and importantly having two-factor authentication for electronic payment approvals.
Examples of Sustainability Risk
The professor also mentioned sustainability risks because these risks may have a significant effect on the firm's finances. Sustainability has been an important issue for some time, and an associated aspect is corporate social responsibility (CSR), but there has recently been a focus on ESG, that is Environmental, Social and Governance-type issues. ESG is now law in the UK and similar laws are coming to Australia, and organisations are now preparing for Australian ESG laws. For example, large companies are now requiring their suppliers to provide ESG supply chain information. The student now saw how sustainability and financial risks were - interrelated.
Greenwashing
Students were beginning to come into the classroom and the professor quickly asked whether the student was familiar with “greenwashing”. The student said he was not. The professor said that if an organisation fraudulently states that it is doing “green” type things that help people or the planet but does not do so, then this is misleading or deceptive conduct, which can attract large fines under Australian law. He said that in late 2023 the Australian Competition and Consumer Commission performed desk research by looking at about 200 websites, and found a significant number were ‘greenwashing’, mainly in the cosmetics, fashion and food industries.
The Importance of Financial Issues
The professor summarised by saying that there is an old saying that “cash is king”, and that if you do not have cash then you are in real trouble. Financial risk is something that must be taken seriously as a lack of money will result in the financial collapse of the organisation. He said that a lack of focus on sustainability issues can also financially affect an organisation.
Other short articles worth considering on this topic include –
Human Resources Risk - https://www.ubss.edu.au/article/human-resources-risk-staffing-and-whs/
Academic and Student Matters Risk - https://www.ubss.edu.au/article/academic-and-student-matters-risk/
External Markets and Associated Risks - https://www.ubss.edu.au/article/external-markets-and-associated-risks/
Regulatory Compliance - https://www.ubss.edu.au/article/regulatory-compliance/
Risk in Education and Training – A Starting Point - https://www.ubss.edu.au/article/risk-in-education-and-training-a-starting-point/
Associate Professor Cyril Jankoff is Associate Dean, Scholarship at UBSS and a Member of the GCA Compliance Directory
