All successful organizations have to take risks so that they can grow and sustain in a highly competitive market. Financial Risk management is nothing but the process of setting up guidelines via certain financial instruments to manage the exposure to risk. To put it simply, financial risk managers or individuals working under this domain mandate the actual guidelines that risk-takers must pursue when undertaking investments or addressing potential threats on behalf of the organization.
There are several financial management studies that will give you a leg up in this bright career of financial management. Let us first understand the basics of financial risk management by knowing the types of financial risks:
As the name implies, financial risks involve monetary loss incurred by the firms. Some risks can be managed directly by the company and some are beyond control. It is highly recommended for companies to anticipate the risks, assess its impact and be prepared with the right plan.
1. Market Risk
There are two types of risk under this category – Directional risk and Non-directional risk. Directional risk primarily occurs due to movements in prices of financial instruments like stock market prices, interest rates, etc. On the other hand, non-directional risk involves the changing conditions in the marketplace. For example, consider the case of an increasing tendency of consumers who prefer to shop online. This is a huge market trend nowadays and can seem to pose a risk for retail shops who need to make changes to adopt this trend.
Another cause can be the risk of competition in the market. In an increasingly competitive global marketplace, companies should mitigate this risk by offering a strong and unique value proposition to its customers by standing out from the crowd.
2. Credit Risk
This is another common risk faced by businesses when extending credit to customers. It can refer to the company’s own risk when making payment policies with suppliers or also the risk incurred due to providing finances of purchases to its own customers.
The company must manage this risk by making sure that it has an adequate cash flow to pay its accounts in a timely fashion.
3. Liquidity Risk
This type of risk occurs due to the inability of the company to execute transactions. Under this, asset liquidity risk refers to the company’s ability to convert its assets into cash in times of need. Operational funding liquidity risk refers to cash flow troubles.
4. Operational Risk
Difficulties arise from the organization’s ordinary business activities like lawsuits, fraud, personal problems, business model risk, etc. These risks often stem out due to operational failures like mismanagement or technical defects.
A Risk is inevitable when it comes to business and effective risk management is essential to manage the survival of the business. Get yourself certified in financial management courses under this domain and contribute to the success of your business.