Risk is involved in every aspect of life. The risk of taking your first steps is falling; the risk of asking a person on a date is rejection; the risk of interviewing for a job is failure; the risk of parallel parking is hitting another vehicle. So, it is guaranteed that creating a business or investing in something financially, as well as physically, involves considerable risk.
What is risk? According to Google, risk is the possibility that something unpleasant or unwelcome will happen. However, according to the business dictionary, risk is a probability of damage, liability, loss, or any other negative occurrence that is caused externally.
From a finance point of view, risk is the probability that an investment’s return will be less than expected. However, risk also offers the chance of reward. For example, a reward could be an increased return compared to a lower expectation. Financial risk is comprised of multiple categories: basic risk, capital risk, delivery risk, exchange risk, interest rate risk, political risk, settlement risk, underwriting risk, and much more.
Examining financial risk includes looking at daily finance operations, such as cash flow, transactions made by the business, and the business’ financial systems set in place. You may consider things like which clients owe the company, how the company plans to retrieve the money, insurance, and its coverage, as well as whether the business can extend credit to customers and how.
When calculating financial risk, external factors like interest rates and foreign exchange rates should be considered. Those factors can affect company competitiveness with services produced abroad; changes in interest rates and exchange rates can immediately affect debt repayments.
All businesses should extensively discuss risk management within the business’ strategic management. Doing so allows the company to identify and tackle any risks before they become an issue, which will in turn aid the chances of reaching defined business goals.
Once the risks have been pinpointed, there are several ways to address them: accept it, transfer it, reduce it, and eliminate it. Acceptance of a risk might happen if the costs are too high to handle it in any other way. The risk could be dealt with by transferring, which typically takes place with the company insurance. Reducing a risk is merely introducing safety measures to keep the risks from occurring, and eliminating the risk could be something like changing the production process. Once the risks have been determined and the type of management has been decided, take steps to put the measures into place.
Risk management is not a one time kind of deal; it requires consistent monitoring and should often be reviewed to ensure the management approach is successful. Set the plan in stone by creating a risk management policy that will identify the company’s approach to risk, and it’s management. The CEO’s and the board should all be on the same page before moving to the management policy phase.
All choices in life and business involve risk to some extent. By understanding what risk is and how to manage it, business and employees are more likely to meet their financial goals.