Risks are unavoidable in business. But that doesn’t mean they don’t need to be dealt with properly. This is especially true where money is concerned, without which your business would cease to deliver its bottom line and go bankrupt.
In this guide, we’ll discuss what financial risks are, how you can identify them and four ways you can mitigate them.
What are financial risks?
A financial risk is any factor or exposure that could lower your business’ profits or cause it to go bankrupt. Types of financial risk include but are not limited to:
- Credit risk – The possibility of failing to make payments on debts
- Liquidity risk – The chances that a given financial asset can’t be traded quickly enough at the right price
- Operational risk – The risk of losses caused by flawed processes, policies or systems
How can you identify financial risks in your company?
If you want to identify your business’ financial risks, you need to have access to high-quality information. Thorough data insights can make the difference between protecting your business against the risks it faces in good time and getting caught out by surprise.
Data becomes available when you concentrate on producing high-quality reporting in financial statements and other key reports. With these objective metrics in hand, you’ll be in a much better position to spot risks and make the decisions necessary to mitigate them.
Four ways to mitigate financial risks
Partner with experts
Enlisting the help of third-party experts can not only help you protect your business from financial risks but also free up your resources to focus on your core business offering. With your company’s finances safely watched over by specialist accounting service providers, you’ll have the peace of mind to double down on what matters most to your business.
Create a strategy
Simply running out of cash is a common reason why businesses go bankrupt. A cash management strategy can help you prevent this from happening. This should include forecasts of cashflow, accounts of all payable balances and debt payments.
Reduce unneeded debts
Most business rely on loans to bolster their cashflow or invest in their growth. But this becomes risky when taken too far. Try to keep your loan balances as low as possible by making minimum payments so that your debts don’t compound. You should also shop around with different providers to better minimise the different costs of borrowing, such as interest charges and lender fees.
Diversify financially
When your business has most of its capital in a single asset class, it’s overly exposed to downturns in that market. Spreading your capital across multiple areas helps minimise the risk that your company is unnecessarily affected by bear markets. The same goes for your company’s income. Serve a larger variety of products to more customers to minimise financial risk.
How you deal with financial risks can make the difference between your business thriving and going bankrupt. But if you gather data insights and take right steps to mitigate the threats you face, you’ll be well on your way to helping your company prosper.
