Financial risk assessment and business growth go hand-in-hand. One cannot survive without the other.
In the olden days, many risk types were estimated before they developed into more urgent situations, posing a material risk to an organisation. Financial managers and professionals were required to speculate on various threats a company could face at any given time.
However, the problem in those days was that they couldn’t monitor and analyse risk in real-time, which meant more catastrophic consequences.
The olden days and olden techniques of financial risk management are now a thing of the past. Today, if an organisation wants to survive the highly volatile and ambiguous financial market out there, an effective financial risk management process is non-negotiable.
Usually, financial professionals and managers go for an online financial management course to update their skills and knowledge in this domain. So till you decide to enrol in one, consider reading on. This guide can help you understand the problems of having a bad one and how to prepare a robust financial risk management process.
Potential Consequences of Not Assessing Financial Risks
Ranging from operational, information technology, sales, HR, and financial risk, there is a gamut of risks analysis companies need to perform regularly. But what if you decide to skip them?
Some of the consequences might include:-
- Inaccurate recording of liabilities, poor equity timing, expenses will not be accounted for properly in the P&L account.
- Financial statements can have loopholes with missing information.
- Missing physical inventory valuation can lead to unrealistic adjustments in the balance sheet, causing a negative equity situation.
- Missing internal controls can lead to improper usage of company funds.
- External relationships like audit, banking, insurance, and legal can become stagnant.
In retrospect, without a financial risk management plan in place, the company cannot grow to its full potential. So make sure you know about the best practices of financial risk management to ensure your company is profitable and in line with its competitors.
Now you know how vital a robust financial risk management plan is. Let’s help you prepare a robust one so you can analyse the magnitude of financial risks.
Steps to Creating an Effective Financial Risk Management Plan and Analysing the Magnitude of Financial Risks
- Identify the Risk
The risks faced by every business looks different, acts different, and responds differently.
It all depends upon the cash-flow situation, geographic location, industry, vendor relationships, and reserve capital.
Financial risk management professionals should have a basic idea of the types of risk their organisation is likely to face in the course of doing business. So when a potentially risky situation arises, they can alert the leadership and help evaluate the potential risk.
An online financial management course can help you learn the effective process of analysing your business’s financial risks. Depending upon the industry you work in, you can scour for a credible financial management course that specialises in the domain.
- Assess and Document the Risk
Risk assessment depends a lot on the specific type of risk faced. So if you are concerned about the financial stability of a vendor, gather information about the vendor’s performance history, its current financial information, and possible alternative vendors just in case.
You know how people say don’t think about the worst-case scenario; it’s improbable to happen.
Well, while assessing any type of financial risk, the primary goal should be to determine the worst-case scenario, the likelihood of crossing that scenario, and the process your business would require to follow to recover from the potential material loss.
Before it brings your company’s solvency into question, develops a process to document risks in each isolated instance and use that information to determine your next steps.
- Delegate Management Steps
Once you’ve assessed and documented the financial risk, it’s time to take the next step – delegate financial management steps.
When financial risk management needs to be analysed, you need a team of financial professionals. Assign one or more members of your team to handle these risk containment tasks.
The more complicated the containment process is, the more human resources you’ll need to assign. So have a point person for risk management who can improve accountability and make it easier to coordinate containment efforts.
One such online certification course that can help you gain in-depth knowledge of the domain is the XLRI financial analyst certification online. Offered in collaboration with Talentedge, this course can not just help you understand the top trends of financial management but also the assessment and recovery from these risks.
- Take Action
Now you’ve financial risk management procedures in place, all you need to do is assign team members to risk containment, execute those procedures, and provide an update on the process.
For instance, if the risk is related to a business’s future liquidity, your team members should start by closely monitoring the cash flow to ensure that the new financial venture is not on its way to create a liquidity issue. And if there is a red flag, your team must take action to mitigate the risk by adjusting cash-flow management before it results in material losses.
This is where the XLRI financial analyst certification online can help. That’s the beauty of financial risk management; FRM’s can pursue an online or distance education program to upskill themselves. XLRI realises the need for financial risk managers to stay relevant. This is why, in collaboration with Talentedge, a reputable Edtech platform, XLRI is offering a comprehensive financial management course online that can help FRMs stay abreast of all changes in the financial market.
- Monitor/Maintain Progress
According to how the risk management procedures play out, you may assign team members to keep a close eye on the situation and monitor any developments requiring further intervention.
Even after the risk is contained, periodic reviews need to be performed to ensure that no new complications arise, raising the level of risk.
Now you know how to prepare a robust financial risk management plan; you know how to analyse the magnitude of financial risks, it’s time to learn how to mitigate them. Consider enrolling for the XLRI financial analyst certification online and discover the A-Z of managing financial risks effectively.