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.
Types of Financial Risks
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:
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.
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.
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.
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.
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.
Financial risk analytics is a rapidly evolving function in the modern age financial sector due to increased responsibility on the risk analysts to not only provide solutions concerned with risk management but also expected to preempt any financial catastrophe. To perform these roles and functions efficiently, financial risk analysts need to have a solid understanding of the various analytical techniques used in financial markets such as equity, interest rate, foreign exchange, etc.
Finance courses certification is a conglomeration of all analytical techniques involved in the treasury, risk, and investment management. These programs not only focus on core financial risk analytics concepts but also include quantitative techniques as well as macro-economic indicators for successful investment and wealth planning.
Let’s study the concept of financial risk analytics in detail.
Financial Risk Analysis Concepts
Financial risk involves a conceptual understanding of several factors that contribute to its understanding. The concepts are highlighted below:-
Risk and the Cost of Equity
An investor will only invest in a stock if he/she is sufficiently compensated for the financial risk with potential returns. The additional return is otherwise considered as the cost of capital. This cost of capital is estimated by:-
- Capital asset pricing model (CAPM)
- Arbitrage pricing theory (APT)
- Multi-factor model (MFM)
The Balanced Scorecard System
The balanced scorecard system, developed by Drs. Robert Kaplan and David Norton are used by Governments, non-profit organizations, businesses and industries as a tool for strategic planning. The scorecard offers a balanced view of the financials of an organization. The purpose is to understand and create a common goal for the organization, evaluate its performance, and improve communications.
Analysis of the Cash Risk Flow
Experts use both net worths as well as cash flow statements for the purpose of assessing the cash flow risk. The net worth helps generate a number that would represent the financial situation at hand. As for a cash flow statement, it adds together all the expenses as well as income to understand whether an organization has positive cash flow or a negative one.
Analysis of Employment Risk
This analysis is rather beneficial for borrowers. Borrowers are required to take a closer look at their current job situation. Unless you are working in the government sector where the threat of being shown the pink slip is rare, you need to be mindful of remaining in employment throughout the duration of the loan period. A loss of a job can ruin your credit and throw your financial situation into a quandary.
End Notes
Financial risk management is important for any organization who wants to expand and grow. In order to understand the complexities of financial risk analytics, you need to acquaint yourself with the nuances of financial risk. A financial risk management certification can help you do just that. Finance courses certification provides a practical introduction to the concept of financial risk analytics with a focus on data-driven modelling, and statistical estimation of credit and market risks. One such course if the financial risk management certification from IIM Kozikihde, offered on the Talentedge platform. The course intends to provide practical knowledge, imparted through live and interactive learning exercises to develop hands-on skills that can be applied to practical scenarios.
More Information:
What does a financial risk manager do?
How to Make a Career in Financial Risk Management?
The A-Z of Building a Career in Financial Risk Management
Finance Risk Manager vs Financial Analyst: Which is a Better Career Option?
