Business activity, regardless of the sector to which it belongs, is always surrounded by a certain insecurity. To stay alive, companies need to invest, either to increase their production or to increase the material and human resources that allow them to continue growing. In short, they have to make decisions that will affect their profitability and with which they will have to assume certain financial risks.
Fortunately, there are always ways to minimize that financial risk. In this article we tell you what kind of contingencies you can find and also some tips to reduce their impact on the company.
What is financial risk?
Financial risk at the business level refers to the possibility of some type of loss or damage occurring when making an investment. It is usually linked to profitability. The benefits will be greater the greater the risk. But they will also increase the chances that everything will go wrong and you will end up losing money.
Types of risk
Liquidity risk. It occurs when a company cannot pay its debts in the short term. You may have assets but when you sell them you do not have enough liquidity to meet your obligations.
Market risk. It is related to the operations of the financial markets. It can be subdivided into:
- Interest rate: refers to the risk involved in the variation of interest rates, that is, their rise or fall at the least favorable time for the company.
- Exchange: it is very important that investments are made in a currency that is stable and does not have high volatility . A large depreciation of it can be disastrous for the company.
- Market: this is the risk assumed when playing with financial instruments such as shares, bonds, etc.
Credit risk. It is the one that is assumed when one of the signatory parties of a contract does not fulfill the obligations of the same; that is, it does not make the payments to which it is obliged or is delayed. The consequences for a company are disastrous since it can alter cash flows or that it has to assume some type of penalty for late payments.
Operational risk. It is related to the internal functioning of a company. It is about the possibility of suffering some type of economic loss due to unforeseen internal events: lack of personnel, fraud, erroneous actions, inadequate technology, etc.
Tips to minimize financial risk in your company
Analyze the profitability of investments . The risk will decrease as the amount of information available about the investments to be made increases.
Identify the factors that increase the risk. Among them are the costs, the price or the possible changes that the industry or sector in which it is going to invest may suffer.
Develop a contingency plan. After analyzing all the variables that can increase financial risk, it is necessary to design a contingency plan that allows the company to deal with unforeseen events that arise and avoid liquidity problems .
Hire insurance . Although initially they may represent a significant expense for the company, insurance can save it from bankruptcy in the event that the profitability of the investments made is not as expected.
Have a reserve fund so that the company can continue despite having made a bad investment.
Evaluate the results obtained . To do this, it is advisable for the company to hire professionals who are familiar with market trends and have investment experience.