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Financial Risks are the risks associated with the financial structure and transactions of a particular industry.
The financial risk most commonly referred to is the possibility that a company's cash flow will prove inadequate to meet its obligations.
Credit risk, liquidity risk, asset-backed risk, foreign investment risk, equity risk, and currency risk are all common forms of financial risk.
Stressing on the need to treat finance with so much concern, the American business magnate and investor- Warren Buffet stated thus:
"The Rule No.1 is: Never lose money. Then, Rule No.2: Never forget rule No.1."........Warren Buffett........
Financial risk management is the process of understanding and controlling the financial risks that a business might be faced with, either now or in the future. Risk management as have been discussed is not about completely eliminating risks; it's about controlling and assuaging risks.
Risk management idea is to understand what risks you're likely to face, what risks you should rather avoid, and how you're going to develop a strategy to apparently mitigate the possible risks identified.
The key to any financial risk management strategy is the plan of action. These are the practices, procedures and policies your business will use to maximize finance.
Take note, that knowing some of the common mistakes many successful entrepreneurs have made will help you make wiser business decision
Some business owners go through many years of making mistakes before they master the art of lowering financial risks.
A good risk management plan will make it clear to staff what they should or shouldn’t do, what decisions they need to take, and the overall severity of any financial risk that might arise.
Who Manages Financial Risk?
In a small business, the business owner and senior managers are responsible for risk management. But, when the business grows to include multiple departments and activities it is advisable to bring in a dedicated and experienced Finance person who understands the difference between operational finance and strategic finance to manage finance and financial risks.
As part of our significance to the business society, this article is spiced with simple ways of emaciating and incapacitating financial risks.
âž½Don’t hire until you have the funds to afford it
Many Business owners with the hope of success hire more employees than they actually need to drive their business goals. Another common financial risk is hiring employees based on contracts promises. Perhaps by reason of the assurance they received from a client.
Take note, that when it’s time to pay your employees, you’ll need to have the funds in your account to cover the payroll costs. So, resist the urge to hire more employees than you can afford before you run down your business.
âž½Never borrow money you don’t need
Take it from me, that qualifying for a business loan can feel like a great accomplishment, but, may also be the worst mistake you can make in business. Banks make money by collecting interest on various types of loans, including business loans.
"A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.".......Robert Frost.......
The best way to lower the risks associated with borrowing is to avoid the process if you really cannot respond to it. Therefore, if you don’t truly need a loan, don’t sign for one. And, if you do find yourself in need of funds, borrow only what you need to help your business grow. Paying interest increases your financial risk.
âž½Never under-price your services/products
Some people have a tendency to price their products or services low during the beginning days of their businesses with the idea that low prices will set them apart in their market. However, as operating costs increase, so will the need to increase prices. When this happens, your loyal customers may be offended, feeling that price increases are unfair. The wiser route would be to come up with a more effective way to differentiate your products/services from your competitors’. Even a lay man knows that it’s impossible to make a profit if your services are priced too low. To avoid this financial risk, do some extensive market research. Then, price your solutions near or just above the market average.
âž½Diversify your source of revenue
The majority of your company’s revenue needs to come from more than one source. Initial streams of revenue tend to die off over time. Build many sources of revenue that could be of great support, rather than seek for loans. Avoid the risk of tying your hopes to just one source, by concentrating on building other revenue sources as well.
âž½Don’t fill too many irrelevant positions.
Every person within your company who receives paid compensation should have a justifiable position. Some of these types of positions include those who serve customers or engage clients, those who develop products and many others. Hiring “irrelevant” people can be a serious financial risk, especially if they don’t produce anything or make the company money. This contributes to incurring more cost
We are Gabriel Domale Consulting (a management consulting firm). We work with finance and business leaders to develop the right strategies for the finance transformation journey and manage the challenges that could be encountered along the way including change in organizational culture and attitude towards finance function. We help the finance function to be seen as a trusted business partner delivering high performance, improved policies and processes, and innovative finance operating models. We are experienced in managing all kinds of business risks. We can help you mitigate your financial risks.
▌ We help companies in #Africa to grow by providing advisory in:
âž½ Strategy.
âž½ Finance.
âž½ Corporate Governance.
âž½ Value-for-Money Audit.
âž½ Financial Due Diligence.
âž½ Training & Leadership coaching.
âž½ Search for Non-Executive Directors.
Check out our services through this LinkedIn page: https://www.linkedin.com/company/gabriel-domale
Visit our Website as well: https://www.www.gabrieldomale.com
Article contributed by:
ERIC BEEKA
(Associate Consultant)
Gabriel Domale (Management Consulting)
Port Harcourt | Nigeria
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References:
GABRIEL DOMALE CONSULTING | NIGERIA | +2347034604152 | Email Us Now | Visit Our Website
About us: Gabriel Domale Consulting, a leading management consulting firm, helps companies in Africa to grow, provides insights to leaders and transforms institutions. Our consultants utilize their decades of hands-on experience to provide advisory in finance, strategy, corporate governance, transformation and leadership training to help companies and public institutions to transform their operations. We encourage leaders seeking insights to visit our BLOG here and also Request For Proposal (RFP) for our consulting services here
Published origninally on 26th Feb 2020 15:51:15
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