Financial risk management is a huge topic for any organization. And having a safety or backup net in place can ensure that such risks are mitigated.
Organizations are constantly scouting for finance professionals who can perform this activity effectively. This is why it has become an in-demand skill in the workforce today.
So let’s talk about how to help ensure a safety net for financial risk management and how online financial courses can be useful in getting you up to speed with applied techniques of financial risk management.
Let’s get started!
First of all, it’s essential to understand that there are many different types of financial risk – some more severe than others. There’s an operational risk (e.g., loss from poor processes), credit risk (e.g., loans made with low-quality borrowers) and market or price risk (e.g., stocks).
Mitigating these risks by applying appropriate financial risk management strategies is crucial, but so is ensuring how not to land in such positions in the first place. Here are some ways you can provide a safety net for financial risk management in your organization.
- Start the Race With an Emergency Fund
An emergency fund can provide your organization with funds in the event of unexpected shocks such as natural disasters, medical emergencies, and, most recently, the pandemic.
Putting away just some amount per month will yield an emergency fund within three to four years, And it’s definitely worth considering if your organization has difficulty securing a continuous revenue stream.
What if your company is a start-up?
The same principle applies to emergency funds, but you need an even more aggressive savings plan. And what’s the best way to save aggressively during those difficult initial years of your organization?
Involve all employees in this process! It will help keep everyone motivated and reduce any duplicity between management and staff members about the company’s needs.
It will also help identify low-cost savings options for the organization and prevent unnecessary costs like expensive office supplies that unnecessarily drain cash from your budget.
Finally, it will give all team members a sense of shared responsibility in managing these risks! And such an investment can make your organization more attractive to potential investors.
- Consider Long-Term Insurance Facilities
Long-term insurance is a great safety net for your financial risk management strategy. Such coverage can help protect against the consequences of any eventuality, from a natural disaster to an economic downturn in which revenues drop precipitously, and you need more cash on hand for operations.
Long-term insurance helps replace your organization’s income if it’s unable to produce profits. It can also provide capital if your organization needs to use additional funds.
You should be confident in these investments before signing up for them, though. Fortunately, online financial courses like this one offer some great tips on how to do that. And this is why all finance professionals must enrol in an applied financial risk management certification. So, get on with it, but make sure it’s accredited by a renowned institution like XLRI, IIM, or SPJMR, etc.
- Get a Line of Credit
Although a line of credit is not the same as insurance, it can come in handy if you need to cover unexpected expenses. If your organization has been making monthly payments on time and maintains a good repayment history, then this should be an easy step for you because most banks and financial institutions are willing to offer flexible terms with low interest rates.
In order to apply for a line of credit, you will need to provide the lender with information about your organization’s financial status and how much money it has available. You can take it from there by getting your application processed, settling on an interest rate, etc.
- Build a Cash Reserve
Another way to ensure that your organization will not face a financial crisis is by building up cash reserves. The key here, however, is to build it gradually and without skipping any payments you owe.
No matter how much capital your organization has on hand when applying for a loan or line of credit, some lenders may still refuse to sanction/approve your application. This is why it’s so important to build up a cash reserve.
The best time for building up that reserve? When you have the money available – be it from profit margins, business expense cuts, or savings.
- Cash Flow Projections are a Great Idea
It is also crucial that you maintain a healthy cash flow projection to make sure your finances are in order. Maintaining such projections means being aware of the business expenses and income and how they relate to one another.
Online financial courses can help greatly when it comes to understanding this concept in-depth – like calculating different ratios like debt-equity ratio, profit & loss, income & expense, etc. In fact, you can go from being a finance professional to being an online entrepreneur by enrolling in these applied financial risk management courses from IIMs.
- Expand Your Offering Across Industries and Customer Bases
90% of businesses expect Covid-19 to fundamentally transform the way they do business in the next 5 years.
And this crisis will have a lasting impact on their customers’ needs, which is why businesses are trying to identify and address new opportunities that are being curated by the changing business landscape. So your organization should explore new customer bases across different industries or sectors.
You can do this by changing the sales model, creating new offerings, etc. For instance, Dyson and automaker GM entered the medical industry by manufacturing ventilators. Expanding into new markets may seem contrary to the common belief of staying in your land, but the crisis has its way of shattering norms.
So, What’s Your 50% Plan?
What would your business look like if the revenues got cut in half?
This is a crucial question to ask of your business plan. And the answer you come up with should be backed by a detailed, actionable plan that defines what needs to happen if this scenario plays out and how it will impact different areas of the company.
Luckily, there are several ways in which companies can prepare for such financial shocks, some of which are mentioned above. If you strive to gain more knowledge about such ways, consider enrolling for online financial courses. An applied financial risk management certification from the IIMs and Talentedge can help you understand the intricacies of FRM and how to overcome the common challenges.
