Introduction to Financial Risks
Risk is inherent to any business enterprise, government, even individuals. However, some of them cannot be controlled. For instance, change in currency movements, interest rates, stock market disruptions, etc.
Simply put, the ones related to or have some financial factors in play are known as financial risks. Some of the examples of financial risk include credit risk that refers to the default that arises from borrowing money and market risk which refers to the risk of changing business environment.
Since it is nearly impossible to manage some of them, risk management is an essential aspect of running a successful business. Let’s help all finance professionals out there understand the impact of financial risks in detail.
Impact of Financial Risks on Businesses
Financial risks related to credit usually include the risk that arises from borrowing money. This is one aspect that almost every company goes through, whether to fund new product development or enable the business to grow and expand. Companies must ensure that they can meet the repayment terms because a failure to do so may result in severe penalties and of course, bad credit.
As the name suggests, financial risks that pertain to a cash flow problem are known as liquidity risks. Such risks affect the business’s ability to ensure that it has ready cash available for extreme circumstances. This a major concern for seasonal businesses that are subject to regular downturns in trade. Such financial risks can lead to significant problems and may even lead to the closure of an otherwise viable business.
Impact of Financial Risks on Markets
Markets today are volatile, not only due to the technological advances but also due to the financial impact of default and change in market rates. In context to financial risks, default refers to the situation wherein the debt or bond market fails to pay their debt obligations, harming investors. On the other hand, changes in the market rate can push individual stocks into being unprofitable, lowering the return ratio.
Impact of Financial Risks on Government
Financial risks affect not only the business and its environment, but also the government, that too in a significant manner. Suppose the government fails to control its monetary policy and is unable to control inflation as well as defaulting on its bonds or other debt issues. In that case, the entire economy may fall under. Not to mention the debacle it’ll lay on the entire world’s GDP and the stock market disruption.
Finance professional online courses can help you gain in-depth knowledge into the impact and how to mitigate such risks, but let’s put a pin into it for now and focus on how to manage financial risk.
How to Manage Financial Risk in Business?
The rationale is simple. Companies must address such risks with proper cash flow management.
Cash is the salvation of a business and a critical factor for other forms of risk management.
Governments need to focus on their monetary policies and control inflation by way of implementing several financial risk management strategies. As far as markets are concerned, companies need to hire the right experts who can manage such risks and provide crucial guidance.
Learn More About Financial Risk Management
The increasing complexities and the advent of technology have made it more pivotal than ever to focus on managing risks. The ideal way to learn how to manage financial risk is to pursue credible finance professional online courses. These finance professional online courses are perfect working professionals, finance and banking professionals as well as risk management professionals looking to hone their skills to stay relevant in today’s dynamic environment.
One such course you can pursue is the AFRM online professional program by IIM Raipur. The AFRM online professional program by IIM Raipur aims to familiarise professionals with various instruments and their practical application for effective risk management.
Focus On Mitigating Risks
By gaining in-depth knowledge in the domain and acquiring the right certifications as well as training, you can effectively mitigate risks no matter which industry or sector you are working in. The AFRM online professional program by IIM Raipur, one of the esteemed institutions in the country is the ideal choice for aspiring and working professionals who are unable to quit their jobs but are willing to upskill.
Risk management is a group of procedures used to measure, identify, control and monitor risks of business activities that can affect the financial performance. Risk management not only enhances company value but also aims for the survival of the organization in the intense global competitive ecosystems. Risk management professionals are expected to stay one step ahead of their peers in knowledge acquisition by completing financial risk management courses that can help in effective shielding of the organization’s finances from unknown external factors.
FRM certification is one of the top finance courses in India that infuses dynamic and forward-thinking in business professionals to effectively address the risk situation and chalk out workable strategies to cut financial losses.
Types of Risk
- Pure Risk is the scenario where certain events can negatively affect the assets of the organization like a warehouse fire. Workplace risks involving accidents in company premises and legal risk that arise due to bad contract drafting and incorrect documentation.
- Speculative risk refers to the expectation of profit and loss. Market price volatility decreases the stock prices of the company’s core portfolio and results in deterioration of the balance sheet of the organization.
Role of Risk Management in Financial Organizations
Risk management aims at accepting, reducing, avoiding and transferring risk to secure the natural revenues of the business organisations. Risk management department focuses on the following categories of risk that an organization can be exposed to:-
- Operational, Credit and Market Risk
- Legal and Regulatory Practices
- Deterioration of inventory due to shortfalls in Quantitative discipline
An important role of Risk management in financial organizations is the deployment of financial derivatives to improve the net worth of the organization.
Risk management procedures are responsible for the transmission of monetary policy changes into the organization’s financial system and researching as to how to improve business outcomes by investigating the macro-economic indicators of the market in which they operate.
Risk Managers should be able to demonstrate the ability and knowledge to respond and provide effective solutions to top critical risk scenarios that can create havoc on the market capitalization of the company. Business managers should upgrade their skills on par with international standards by taking financial risk management courses.
Impact of Risk Management in Financial Organizations
- Effective Risk management concentrates on assisting companies in the achievement of financial targets.
- Risk management techniques lead to the organizations enhanced earning stability which in turn motivate major stakeholders to increase investments.
- Focusing on the protection of immediate sources to finance the company’s profitable projects is a key Risk management technique to make sure that assets are not diverted that could result in loss of potential future opportunities.
Risk Management practices are the key success factors for the stability and sustainability of earning and subsequent enhancement in overall business performance. Financial organizations should encourage their employees to pursue finance courses in India thereby increasing the investment in intellectual capital that will lead to positive financial outcomes for companies even in uncertain market conditions.