Intricacies of Financial Risk Management You Must Know About

Risk, of any nature, is a potential threat to every business. And how you manage or mitigate it is crucial to prevent revenue loss.

When running a business, there are several risks involved. However, financial risk has the most significant impact or effect on an organisation. So let’s help you understand the intricacies of financial risk management and find the best course in finance along the way.

Financial Risk Management Defined

The process of handling, anticipating, and managing, financial threats in an organisation by devising robust strategic plans that can help prevent revenue loss is known as financial risk management.

Who is responsible for creating such strategies?

The financial risk managers. They not only anticipate potential threats that an organisation must face but also test the possible remedies and evaluate the situation by implementing those solutions. By leveraging financial risk management tools, the managers help mitigate the impact of such risks.

How? Let’s find out.

Financial Risk Management Process

Be it a start-up, manufacturing firm or a multinational corporation, every company has its own way of dealing with financial risks. Their risk management plans and tactics vary based on several factors, such as their market value, type of business, revenue, etc. However, there are some general stages in an FRM process that you must be aware of:-

• Identify the Exposure to Risk

How can you cure a disease if you don’t even know what it is?

Similarly, you cannot mitigate risks if you cannot identify them in the first place. So, firstly, you need to identify the risks, its root causes and sources. You can begin by going over the firm’s annual balance sheet.

This can help you get aware of the firm’s current financial situation, including its liquidity, debt, interest rate risk, exposure of vulnerabilities, cash flows, etc.

• Put Numerical Values on The Risk

Risk is uncertain, and the more accurate picture you have of it, the better you’ll be equipped to handle it.

Risk management professionals leverage several tools and strategies to give an estimated value to financial risk. You can leverage the standard deviations tools to quantify the exposure of your organisation to potential financial risks.

However, to be able to do that, first, you need to understand the “how” and “why”. This is where credible online courses like the IIM Kozhikode financial risk management course comes into play. By providing you with in-depth knowledge about financial risks and its analysis, this course can help you estimate the impact of such risks.

• Act According to The Information

After you are done quantifying the risks, you need to take action to mitigate them. Can your organisation afford to run with this risk? If not, what is the best way to mitigate it? The decisions you’ll make need to be backed by sufficient data. However, you must also keep in mind the company goals, the cost of mitigation, etc.

Types of Financial Risk Management

There are several ways to categorise financial risks. However, the most common types are:-

• Market Risk: Refers to the sudden change in the business market in which the organisation competes.
• Liquidity Risk: When a company doesn’t have enough liquid cash to cover the expenses or operate.
• Credit Risk: The risk that arises when an organisation fails to fulfil its obligation towards their counterparties.
• Operational Risk: Arises out of operational failures such as technical failures or mismanagement.

Financial Risk Management Techniques

Here are some of the most prevailing financial risk management techniques you must know about. You can also gain this knowledge by enrolling for the best course in finance like the IIM Kozhikode financial risk management course. Moving on, let’s discover the most popular techniques for FRM:-

• Have Proper Amount of Insurance at Backend

An insured firm is a safe firm.

Financial risk management is all about mitigating losses. And if your firm cannot mitigate those losses, consider replacing or looking for an alternative option. Whatever the situation or position may be of your organisation, you must make sure the insurance policies are in place and up-to-date.

• Keep Adequate Emergency Funds

Emergency funds can serve as a protection wall against unexpected financial risks. Setting up an emergency fund for small and big risks can help your organisation prepare for unexpected losses. For instance, if your company would have adequate savings to cover up losses for Covid-19 pandemic, maybe it wouldn’t have hurt your bottom line as hard as it did.

• Diversify Your Investments

Don’t put all your eggs in one basket.

Diversification is the key to reducing financial annihilation. Make sure your firm doesn’t invest all its money in one place. Make multiple diverse investments; this can help your organisation acquire funds as and when required, which is extremely beneficial in dire situations.

So, diversify your firm’s investments.

Benefits of Financial Risk Management

Financial risk management not only helps your organisation coordinate and control necessary business data or processes but also provides a better understanding of performance and profit sources. Successful FRM strategies can be the guiding light which pulls your organisation through the murky waters of the unstable financial market.

Financial risk management can help your organisation:-

• Avoid catastrophe
• Maximise opportunity
• Ensure business growth
• Align company goals
• Make sure it has enough funds
• Make data-driven decisions

Aspiring to Learn More About Financial Risk Management?

Every investment decision or strategy formulated to mitigate financial risk needs to be up-to-date and in line with company goals. Devising such strategies requires experience, knowledge, and an advanced skill set, which can be gained by enrolling for credible online financial risk management courses.

One such online course you can rely on is the IIM Kozhikode financial risk management course. Offered in collaboration with Talentedge, the IIM Kozhikode financial risk management course can help you grab more opportunities and gain an in-depth understanding of how the financial business world works. Boasting of LIVE & interactive learning, coupled with a comprehensive curriculum, is what makes this course the best course in finance.

The number of global opportunities in the finance domain is endless. By equipping yourself with a credible certification, you can build a thriving and highly rewarding career in this domain.