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RISK MANAGEMENT

ALDAR University Policy Library

STANDARD 9. FISCAL SOURCES, FINANCIAL MANAGEMENT, AND BUDGETING
Finance RISK MANAGEMENT

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This plan serves as a comprehensive framework that identifies, evaluates, and mitigates the negative impact of different financial risk sources, which may expose the ADUC to potential financial resources losses or fluctuation of financial performance. 

 

Risk Identification:

  • Credit Risk

Credit risk is the risk that one party to a financial instrument will fail to meet an obligation, causing the other party to incur a financial loss. 

  • Liquidity Risk

Liquidity risk is the risk that the ADUC will encounter difficulties raising funds to meet its liabilities when they become due.

  • Interest Rate Risk

The ADUC is exposed to interest rate risk on its interest-bearing assets and liabilities, namely medium-term loans and borrowings.

  • Accounts Receivable Risk

While ADUC balances between all stakeholders’ interests, certain special situations faced by some students can justify granting them credit facilities by postponing the payment of due balances or accepting settlements by post-dated cheques, the accounts and cheques receivable risk is identified by the overdue customer balances and the cheques receivable and the potential that such amounts are becoming uncollectible.

  • Business Risk

Business Risk involves the risk of declining revenues due to a decrease in the number of students or prices, or the uncontrolled increases in expenditures during the normal course of business activities, which will ultimately affect the financial performance and the ability to meet certain requirements to ensure the smooth running of operations.

 

Risk Evaluation and Mitigation Methodology:

  • Credit Risk

Financial assets, which potentially subject the ADUC to the concentration of credit risk, consist of the current bank accounts. The ADUC mitigates its credit risk concerning the bank deposits throughout:

  • Dealing with high credit quality financial institutions, in addition to conducting a continuous review of the financial institution’s credibility, considering the trade-off between the benefits obtained from dealing with a certain financial institution and the credit risk involved. 

 

  • Liquidity Risk

To mitigate such risk, the management should regularly ensure the availability of diversified funding sources and continuous monitoring of liquidity sufficiency. 

  • Cash flows forecasting serves as a key indicator of future cash sufficiency.
  • Availability of easily accessible sources of funding, either through equity or debt sources, should be maintained to raise necessary funds to meet any financial obligations and ensure the smooth running of operations.

 

  • Interest Rate Risk

To mitigate the risk of having lower rates on deposits or higher rates on term borrowing compared to the changes in interest rates prevailing in the market, the ADUC’s financial management should: 

  • ADUC should conduct a continuous revaluation and analysis of the market rates to maximize interest revenues on deposits and minimize interest expenses on borrowings.

 

  • Accounts Receivable Risk

The accounts receivable risk is mainly involved with amounts due from students and other customers. The ADUC mitigates the accounts receivable risk throughout:

  • Continuous review of the aging of accounts receivable balances.
  • Tracking the amounts of bounced cheques, their value dates, and taking needful actions towards collecting such accumulated balances. 
  • The ADUC should continuously find sustainable funding sources throughout different fundraising.
  • System controls should also be put in place to easily identify accumulated balances and alert the finance team to take necessary action towards the collection.
  • Sufficient allowances for doubtful debt are considered a reserve to face any future losses due to uncollectible accounts.

 

  • Business Risk

To avoid the potential negative impact on financial performance and the ability to meet certain requirements, and to ensure the smooth running of operations, several approaches and techniques should be adopted by the ADUC’s management to mitigate the different types of business risks as follows:

  • The ADUC’s management should follow a continuous improvement approach to mitigate such risks, throughout continued efforts that aim to improve the quality of academic programs. 
  • The planning and budgeting process also helps in addressing the critical business risks involved in different business activities and the level of uncertainty that is inherent in the planning process. 
  • As part of the annual operating budget preparation cycle, and to account for the typical uncertainty regarding emergency spending needs, a contingency fund should be created.