How to Utilize Financial Risk Management for Your Business
Businesses are not without risks. The biggest concern of all businessmen and
entrepreneurs as they go into business is, obviously, that of their venture failing,
and failing spectacularly.
Even companies that have existed for years, even decades, are still constantly
faced with different types of business risks. Just because the business has been
operating for more than 5 or 10 years does not mean that it has developed an
immunity against risks.
It is possible that the organization employs effective risk management
strategies, allowing the business to thrive and even grow. Take note that the phrase
“risk management” is used instead of, say, “risk elimination”. This is a clear
indication that business risks will always be there. What management and owners
can do is to “manage” these risks – to minimize the negative effects of the risks to
the company and “soften the blow”, so to speak.
There are five identified types of business risks.
Strategic risk arises when the business plan or model is not followed, so that
the business eventually loses its direction and loses sight of its organizational
goals.
Compliance risk refers to the possibility that the business may not be
obeying, or adhering to, applicable legislation and regulations in the conduct of its
operations. A business decision, such as geographical expansions or extending the
product line may put the business at risk of violating or not complying with
specific laws.
The third type, operational risk, result from the failure of the organization’s
internal processes and systems to carry out day-to-day operations. This could arise
from incompetent employees, faulty business processes, obsolete technologies and
so on.
Reputational risk refers to the risk that the reputation or image of the
business will become damaged.
The fifth type of business risk is financial risk. Financial risks refer to those
direct risks that arise from how the business handles the money flowing in and out
of the business. It is also used to reflect the ability of the company to manage its
debts and financial leverage. Another simple description for them is that they are
risks posed by financial transactions. Many people look at it simply as the
possibility of suffering financial loss.
What are the possible causes that give rise to financial risks? Let us take a
look at some of them.
Financial market instability.
Economic factors. Countries’ economies and various industries may
experience problems on a large scale, a classic example of which is when a
recession happens.
External parties’ actions and decisions. Financial risks are also likely to
arise due to the actions of external parties, such as vendors, suppliers, competitors
and even customers.
Internal actions (and inactions).. If employees refuse to do their jobs, this
could lead to low productivity and, subsequently, low output levels.
Legal interventions. From time to time, governments come up with new
laws, or update existing ones, that will have an impact on the financial aspect of
the business.
Financial risk management is the plan of action that an organization will
implement to address the financial risks it is facing, and is likely to face in the
future.
Basically, a business will utilize financial risk management to forecast and
analyze financial risks, and identify the procedures or actions that must be
implemented in order to avoid them, or minimize their impact.
In Peter Christoffersen’s Elements of Financial Risk Management, he
identified three major activities or stages:
Identifying the financial risks, and their sources or causes.
Measuring the level and impact of the financial risks and their effects.
Determining plans and strategies to address the risks, and implementing
them.
In addition to these three activities, financial risk management also involves
continuous monitoring of the risks taken and taking careful note of the exceptions,
if any. Analysis is also required, which means that documentation of the risks (and
their results) must be prepared.
TASKS
1. Give the English equivalents:
Самая большая забота - the biggest concern
Очевидно - obviously
рискованное предприятие -
сталкиваться с (2 structures) – faced
иммунитет против рисков - an immunity against risks
эффективные стратегии управления риском - effective risk management
strategies
процветать - to thrive
смягчить удар - soften the blow
потерять направление- loses direction
подчиняться применимому законодательству – obey applicable legislation
нарушать закон – comply laws
выполнять ежедневные операции - to carry out day-to-day operations
устаревшие технологии - obsolete technologies
испорченная репутация – damaged reputation
продавец - vendor
поставщик - supplier
конкурент - competitor
низкая производительность - low productivity
применять определенные процедуры во избежание финансовых рисков -
identify the procedures implemented in order to avoid financial risks
непрерывный мониторинг - continuous monitoring
2. Answer the following questions:
1. What companies are exposed to risk?
All companies are exposed to risk.
2. What is the difference between risk management and risk elimination?
Risk management means that management and owners can do is to “manage”
these risks – to minimize the negative effects of the risks to the company and
“soften the blow”.
Risk elimination means the complete disposal of all risks, but this is not
possible.
3. What is compliance risk connected with?
4. What is financial risk management used for?
Compliance risk refers to the possibility that the business may not be obeying,
or adhering to, applicable legislation and regulations in the conduct of its
operations.
Financial management risk used for forecast and analyze financial risks, and
identify the procedures or actions that must be implemented in order to avoid them,
or minimize their impact.
5. What type of risk is the most difficult to manage in your opinion?
3. Formulate the theme and the main idea of the article.
