Author: Ümit Köksal
Integrated Financial Risk Management with Enterprise Resource Planning
Enterprise Resource Planning (ERP) is one of the methods that has emerged to protect against both financial and operational risks brought about by the economic conditions of today’s business life and is widely preferred to be used in business life.
However, when we review the enterprise resource planning applications in businesses, the most critical finding that draws our attention is this: Is enterprise resource planning an accounting software program used only to carry out the financial processes of the enterprise in a relatively more post-modern manner, or is it an essential milestone in the management of the data used in the pre-determination of risk with different alternatives and standards? Is it a unit of stones?
The fundamental elements that enterprise resource planning should include, which is used to test whether an effective integrated risk measurement and management system is implemented by establishing a bridge between enterprise resource planning and risk management tools of actual sector companies:
- Containing data for different scenario analyses that are not limited to generally accepted accounting principles and allow for rationality tests,
- Carrying out value-at-risk analysis to cover off-balance sheet assets and liabilities and appropriately carrying out stress tests for capital adequacy within the framework of financial compliance,
- To increase the effectiveness of internal control, the authorities used within the enterprise for enterprise resource planning are carried out as a result of detailed analysis in accordance with the principle of separation of duties,
- Within the framework of corporate finance, it is listed as enabling the analysis of both book value and trademark value, which will be subject to the market value of the institution, as a result of predicting the financial performance expectations created based on future period projections, taking into account the prudence principle based on all business lines of the institution, with today’s economic indicators.
Financial planning and analysis results, which will be made by updating the actual economic data obtained at periodic intervals from the financial information system used for enterprise resource planning, lead to the updating of the financial risk map of the enterprise.
As a result of these financial measurements, much more rational financial risk predictions are achieved by updating the country risk premium, interest risk, exchange rate risk, and maturity risk on the financial risk map of the company and renewing the financial performance projections.
In addition, a secondary financial risk management planning software is used following corporate resource planning to create a consolidated risk map covering financial risk management in all different business lines due to the growth of economies of scale of affiliated business lines within the corporate group. The integration between the two planning software in question is carried out with an interface software. The current risk map of the corporate group is created by integrating the financial performance indicators obtained through enterprise resource planning into the financial risk management planning software.
By keeping all costs under control in the risk maps to be created against today’s economic conditions and by making relatively more realistic efficiency analyses of investments, prudent forecasting of net working capital positions along with future cash flows is among the indispensable elements of all institutions within the scope of effective risk management.
In addition to this cash generation cycle that will be envisaged for strategic financial investment projections, two critical issues should be addressed. These are the continuous growth rate of the long-term cash generation cycle and the discount rate used to index these cash flows to the present.
An essential factor determining the continuous growth rate is that the trend in the growth of financial data in past periods obtained through enterprise resource planning is progressing to future periods with a reasonable growth rate.
When predicting the discount rate, a more difficult challenge awaits us than the growth rate. In addition to the positive or negative change in the financial leverage ratio of the institution, depending on the difference in the net working capital that will be required, in case there are off-balance sheet assets and liabilities, value-at-risk analyses are made to determine the discount rate in question, and the borrowing that will occur in the worst case scenario. The discount rate must be determined by considering the product’s structure.
Following the determination of the discount rate, the equity size formed by the present value of cash-based financial performance projections for future periods for creating the institution’s financial risk map will include the focus of the institution’s financial risk map. In the following periods, deviations that will occur from comparing the actual financial performance indicators with the predicted financial projections become an early warning system regarding the course of the institution’s capital adequacy. Therefore, it can be expected that the business needs new financing policies in investment funding methods due to positive or negative deviations from capital adequacy.
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