In every company, there are some crucial things to understand for keeping the business stable and growing operations so watch for these 5 Business Financial Risks You Should Keep an Eye On.
People not only focus on maximizing the income but also have to pay attention to an equally essential part, which involves reducing the potential loss of money while operating.
It’s financial risk management, and we are going to provide you with some insight into this process.
Table of Contents
Market Instability
Any uncertain movements of the market can majorly induce market instability.
It can be the change in the demand of customers, an outstanding move made by your competitor or the lack of technology integration.
It is a challenge for many companies, especially new ones.
Since it requires a certain degree of flexibility to adapt to the market, the adaptations can be significant and use up a considerable chunk of the already limited resources of the company.
Ultimately leading to a few possibilities: Being unable to adapt and going bankrupt.
Taking a chance and ending up with a huge loan. Or another round of getting investors involved.
The solution can be finding your company’s unique advantage and being able to take the lead against your competitors.
Research the market thoroughly before making any financial decisions.
Operational Risk
This can be brought about by the strategic failures of your company.
External risks (including lawsuits) and failures in internal day-to-day operations.
It is hard to eliminate this kind of risk.
Since it’s bound to many indispensable elements, each of these comes with its own set of risks (fraud, human mistakes).
With these kinds of risks, you can cover some of them by getting an insurance package.
Ring up an insurance company and ask them how they can help you reduce these risks.
Credit Risk
This is the kind of risk related to loans or other circumstances that involve a monetary obligation between two parties.
For example, if your partner decides to take a loan but is unable to pay during the repayment period, then your company is at risk.
Sometimes, this is the kind of risk that companies have to take.
But it can be avoided or minimized by valuing your borrower’s credibility before you take out a loan.
It could be done by looking into their credit history, financial status, and operating efficiency.
To avoid debt would be the best option if it is a one-off expense (fixing a roof of a property, for example).
A wise thing could be to contact insurance professionals and seeing if your current insurance can cover it.
Liquidity Risks
This risk is by the inability to pay for short-term debt mostly for not being able to sell their assets quickly enough to meet the obligations between the two parties.
This can be managed by using a liquidity ratio, which gives you more perspective on the short term debt and the liquid asset of the company.
If the liquidity risk reaches an alarming level, selling its assets is a must, and the money it brings back could save the business.
Having a healthy cash-flow and how to deal with the ins and outs of it is a skill, and it can be learned.
It’s essential to be able to identify when there is a cash flow problem.
It is necessary to know all of the expenses and the expected sales.
If sales don’t match the companies expectations or the spending is too high, it could be a recipe for disaster.
There are ways to figure out your spending quite easily online with cash flow calculators.
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Not Having Company Savings
Having extra emergency cash is a great way to avoid the stress of unexpected events.
You should have extra cash in case anything happens, having at least two months operation costs covered is a great start.
If you are in the tourism, agriculture, or seasonal industry you should even have a whole season or two covered.
Imagine a mushroom farm, for example, that doesn’t deliver any mushrooms for four months because there was an unexpected rain, or the hygrometer was faulty.
From one poor season, you could file for bankruptcy.
On the other hand, if you had more cash, you could have hit the jackpot for the second season that year.
To Sum Up
A stable financial condition is a must for every successful business.
There’s an uncertainty in every financial decision that we make.
But we can always avoid or reduce the eventual loss for each situation and hope for the best.
