How Financial Risk Management Helps Businesses

Have you ever stopped to analyse whether financial risk management is done correctly and efficiently in your company? Do all efforts to avoid bankruptcy in the business? You are likely to be divided when answering this question, as it is sometimes overlooked by managers. 

 

Why prepare to avoid bankruptcy? 

Dealing with market fluctuations and unpredictability is a task for both large and small companies and is a fundamental part of the growth process. 

As the market undergoes constant changes, it is necessary to be prepared to minimize the impacts on the financial sector and to act correctly when an unexpected event arises, avoiding bankruptcy. To do this, financial risk management is essential. 

After all, as previously mentioned, it is through this management that it is possible to deal with fluctuations and unpredictability of the market, in addition to being able to foresee changes, reduce negative impacts and also know how to act appropriately from each event. 

If you want to understand more about financial risk management and how to implement it in your business, keep reading this post until the end. 

 

What is financial risk management? 

To understand more about financial risk management , it is necessary to know that any institution that seeks to increase its profits through the sale of products and services, is certainly taking risks - product delivery risks, operational risks, market risks, quality risks , among others. 

Therefore, the main objective of financial risk management is to reduce the effects caused by the market in the company. Therefore, it is considered a managerial measure that allows the company to be prepared in advance for any changes that occur in the scope of business. 

However, this attitude goes beyond what is thought, because anticipating possible risks, controlling expenses, and improving the company's financial management can prevent even the business from breaking down. 

 

Main financial risks for a company that can result in bankruptcy 

But what are the main financial risks that surround a company and should be avoided so that there is no bankruptcy? Basically, they are defined in four types: 

Operational risks 

Operational risks relate to the possibilities that the company must be affected by losses that occur due to the failure of employees, processes, or internal systems. As an example, we can mention defects in obsolete equipment, software, or hardware or even little or poorly qualified professionals. 

Market risks 

The market risk relates to changes that refer to prices and rates that can affect in any way the financial situation of the company. As an example, we can mention a company that imports inputs and pays in dollars but commercializes the product in the national market. Therefore, this entrepreneur is subject to a drop in the price of the real, which will directly impact the moment of fulfilling the commitments agreed with suppliers. Therefore, being subject to currency fluctuations is a type of market risk. 

Credit risk 

Credit risks involve the possibility that payment to the creditor will be made late or that payment will not be made. As an example of credit risk, we can mention the financial companies that lend money to customers. 

When an individual or an entrepreneur applies for a loan, it is scrutinized according to its ability to afford that loan contract. If the finance company in question realizes that that customer is at high risk, he must pay more interest. 

However, it is worth remembering that credit risk also impacts other segments such as commerce, industry, as well as other businesses. A distributor, for example, that receives payments through slips is exposed to the risk that its buyer will not pay for the goods after receiving them. 

Liquidity risks 

The last risk, however, is liquidity risk, and it is associated with the company's ability to pay its bills or not. When it is failing to meet its financial commitments, it is likely that behind this there is poor cash flow management due to a mismatch. As an example, we can cite bills that need to be paid, but there is no forecast of cash inflow, which consequently can leave the company in debt and the payment of these debts with fines and interest. 

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