Mikulski
Emilia Mikulska,
journalist Laba
Investing in new technologies, taking out a loan for expansion, or starting cooperation with a new contractor – almost every business decision involves a smaller or larger financial risk. Risk cannot be avoided, but it can be effectively managed. Learn the four main strategies for managing financial risk and learn how to turn risk into success.
According to the popular definition, financial risk is an event with undesirable or unpredictable financial consequences . However, entrepreneurs and decision-makers of companies know very well that without risk there is no success. Financial risk is not a negative phenomenon, but an inherent aspect of business, and if properly managed, it can become the driving force of the company.
Active financial risk management involves finding a balance between income and the risk it carries . These are various actions taken by decision-makers whose common goal is to minimize the risk of losing capital and protect the company from its negative effects. Specific actions that should be taken in the face of a specific risk are indicated by the financial risk management strategy. However, before we discuss specific strategies, let us pause for a moment at the risk itself.
What is financial risk and how to manage it?
Financial risk is something we encounter every day. In our private lives list of georgia cell phone numbers we face the risk of unplanned expenses, for example, when our car breaks down. The risk of losing income, when we get sick or lose our job; and the risk of our investments falling in value or our credit obligations increasing.
The main types of risks for individuals are divided into:
employment/income risks: unemployment, underemployment, health problems, disability and sudden death;
Expense risks: sudden and unexpected expenses that exceed the planned budget;
Asset/investment risks: potential declines in the value of investments, potential damage and theft of assets;
Credit/debt risk: inability to repay debts such as credit cards, loans, mortgages, etc.
Related courses:
Financial management
«Financial Director»
Piotr Stodulski
PANDORA Board Member, Finance Director Eastern Europe, Middle East & Africa
Learn more
piotrl-66fd2e51f3729147397745.webp
delete
«Financial Analysis in Practice»
Elżbieta Kurczak
Finance Manager at Unext
Learn more
chicken-second-643fac71273fb269934740-min-644a69f7d58bc655987549.png
Corporations and financial institutions must consider additional risks such as:
market risk: the risk of adverse changes in market prices or losses on financial assets (for example, loss of value of securities);
credit risk: the risk that a counterparty will not meet its obligations;
liquidity risk: the risk that financing commitments will not be met due to cash constraints;
operational risk: the risk of loss due to the failure of internal processes, people and systems (for example, human error during a transaction that results in a monetary loss);
legal risk: caused by changes in legal regulations.
Financial Risk Management Process
Financial risk management is the development of techniques and safeguards against factors that pose financial risks to a company . The risk management process consists of a series of steps taken to identify potential problems, assess their severity, and determine how to counteract them.
The five stages of the risk management process:
Risk identification
Qualitative and quantitative risk assessment
Defining the risk management strategy
Implementation of risk management strategy
Monitoring strategy effectiveness and risk control
#1. Financial risk management always starts with identifying all sources of risk in the project. We need to find out in which areas of our activity the risk is the greatest and what it is.
The following tools can be used to identify financial risks:
Pre-prepared checklists
Analysis of the company's current financial situation
Brainstorming in a workshop setting
Interviews with internal and external parties and experts
Analysis of the company's previous experience and documentation of other projects
Modeling
#2. The next step is to assess the individual identified risk factors and assign them appropriate priority .
Risk prioritization is very important because threats with a higher degree of urgency should be considered first, and only then should we move on to threats with a lower severity. We assess financial risks both qualitatively and quantitatively, taking into account the severity of the event's consequences and the probability of its occurrence.
