Understanding Various Financial Risks and Managing It
There are a lot of uncertainties one can experience when starting up a business. An entrepreneur must understand these uncertainties so that he can anticipate or formulate a strategy. These strategies shall prevent such concerns that threaten the sustainability and the profitability of the business. Financial risks are bound to exist when operating a business. The good thing is, entrepreneurs can now identify those risks and manage them.
Financial Risk: What is It?
A corporation strives hard to maintain its profitability and then work towards its sustainability. When the financial aspect of an organization is at risk, the company must adopt measures to mitigate the negative impact it causes.
Financial risks are risks that negatively affect an organization’s economic prosperity. When it comes to the health of a company, its financial aspect is a great indicator.
The Different Types of Financial Risks
Since different aspects affect an organization’s financial health, we’ll take a look at these various risks, and we’ll discuss how you can effectively manage it.
1. Market Risks
An organization’s market is composed of the entirety of its environment. Also, the market is filled with uncontrollable circumstances where the company is operating. Since the economy is growing, the emergence of competitors reduces a company’s market share. Moreover, legislative regulations may render an organization unable to proceed with its usual operations, which results in smaller market shares.
To tackle the unpredictable nature of market risks, an organization must be quick to adapt to current trends (like online shopping), integration of technology, diversifying products or services, and promoting customer patronage.
2. Credit Risk
In a business’s natural course, clients/customers may not pay in time. When companies stack up on accounts receivable, their cash flow is disrupted. Unless an organization has a steady reservoir of cash, businesses may struggle to pay for salaries, utilities, and their suppliers.
If credit risks are not managed, businesses may have a hard time recovering bad debts and lose a substantial amount of cash. A well-enforced credit collection or credit terms is one way of obtaining payments of rendered services and goods.
3. Liquidity Risk
The more liquid the business is, the greater chances it has for paying short-term obligations/liabilities. Liquidity rates are measured on how easy/fast a corporation can convert assets into cash. As an example, an inventory that is on stock needs to be sold. Doing so enables the organization to pay for its suppliers. If these items cannot be sold within a particular period, the company may be forced to sell it at a lower price.
One of the best methods to manage liquidity risk is to determine current ratios. Upon having a quantified result, the management can make adjustments to promote rapid cash conversions.
4. Operational Risk
These risks are dangers that a business will encounter in the course of its natural operations. Different industries have different operational risks. For example, industries involved in manufacturing may experience risks in the health or safety of employees. On the other hand, corporations involved with data handling may be liable for leaked data or unsecured platforms.
Businesses must take the time to consult either with third-party professionals like 3E Accounting that can help you mitigate the impacts of identified operational risks.
How 3E Accounting Helps Mitigate Financial Risks
A company may find it hard to identify financial risks and strategize for its mitigation. To guarantee your business’s profitability and sustainability, you can rely on professionals who can help you optimize measures against financial risks. 3E Accounting provides a business setup package in the Philippines, which comprehensively covers the identification of risks and measures of mitigating it so that your business can thrive!
For more details, you can always message us and discover how 3E Accounting can help you!