Financial risk is usually a terminology applied to investing, but as businesses are making a host of monetary moves every day, there has been an increasing focus on how risk management strategies can be used to minimise unnecessary losses. As this is a relatively new concept, let’s take a look at how you can start implementing financial risk management for your company, no matter how big or small it may be.
What is financial risk?
Financial risk typically occurs when business and investment decisions are made. Making the wrong choices can end in capital losses and these can be felt on both individual and corporate levels. There are several financial risks posed during a typical business cycle, and these often relate to credit, legal considerations, equity, liquidity, foreign investments and operational costs. This means that businesses will have to consider the odds of potential money loss on a regular basis. Risk management software and processes can help to ensure that businesses don’t run into the red, which can happen when cash flow isn’t large enough to cover necessary financial obligations.
Three types of financial risk
The financial risk definition tells us that risks are actions and activities that ultimately lead to losses, whether they are financial in nature or something else. Risks within businesses can fall into the following three categories, business risk, non-business risk and financial risk:
Business risks
Business risks are often taken when enterprises make decisions that can potentially increase profits and boost shareholder value. An example of this is when companies put forward large sums into marketing campaigns to launch new products, with the aim of reaching a higher sales quota.
Non-business risks
Non-business risks are out of the company’s control and often refer to the general impacts felt on finances when global, political and economic imbalances occur.
Financial risk
As covered above, financial risk can occur when everyday business functions need to be paid for and speculated on for increased profits.
How to manage financial risk?
The good news is that financial risk management strategies can be implemented to minimise the overall impact of losses to ensure that businesses retain as much capital as possible. It will always be in your best interests to take control of the financial risks posed, and this can be done by:
- Identifying and measuring potential risks
- Defining the level of risk you are willing to take on
- Considering insurance
- Identifying any potential issues with cashflow
- Reviewing financial arrangements with creditors
- Monitoring any extended credit offered to customers
- Diversifying income sources to offset losses
- A regular assessment of risks
Seven benefits of financial risk management
- Coordinate and control necessary business data and processes
- Linking economic cycles with the factors of model risk
- Improved measurement of performance
- A better understanding of profit sources
- The ability to formulate a worthwhile risk management strategy
- Streamlined control over business processes
- The potential to get more investors on board
What are the best methods of dealing with financial risk?
Maximise opportunity
When you appoint a financial risk manager or financial risk processes, you will not only need to define the areas that can cause potential problems, but also to outline the opportunities that offset the losses incurred, like project cost management. With the right implementations, businesses will be able to make fast decisions on good investment scenarios and take advantage of the financial benefits that these opportunities can provide - in both the short and long term and for employees, business owners and shareholders alike. Well-managed opportunities can also give businesses a competitive edge when staying on top of financial market trends.
Avoid catastrophe
Correctly planning for potential risks will give businesses better scope when building worthwhile financial business strategies. The top ones will aim to define what the market trends are and ensure that the potential offered by upward movements is consistently followed. The main goal should always be to keep your business turning a profit while avoiding the financial pitfalls that can occur along the way (and potentially leave you in a deficit). These instances often include taking on projects that won’t prove to be cost-effective in the long run, unsound business investments, or even paying over the asking price for materials and labour needed to complete projects and meet business goals. As with any financial investment, risks can and will happen, but effective risk management can work to minimise and even mitigate negative effects.
Ensure business growth
All businesses will have to consider the fact that there will always be competition. When your direct competitors or newcomers to the niche gain some traction, you could begin to lose audiences and potentially revenue. This means that forecasting using financial risk management could be the difference between profits and losses.
The good news is that businesses with a well-defined financial risk strategy will be able to better-establish their position in their respective markets with pre-determined risk management and improved opportunity scenarios. The core principle is to predict what is likely to occur in terms of your finances and develop a worthwhile strategy that will allow you to continue growth despite of the risks posed.
Is financial risk management going to have a worthwhile impact on my business?
Risk management protocol can prove to be highly beneficial for businesses in a host of niches. Immediate implementations may come with an initial outlay, but the benefits will far outweigh the costs - and in no time at all, businesses will see significant savings. When you use these strategies alongside productivity software such as an online work schedule maker and a human resource management system, as well as boost employee satisfaction with tools like business travel management software the rewards will seem even greater.
