The following article is a guest post.
Business risk in most simplest of terms means that there is a possibility that you might not make or receive any return on your invested capital. It refers to as an exposure to your business’ bottom line. It requires companies to proactively assess what they should do in case a certain circumstance arises, so that they can know if they can handle it or not.
Risk management and financial services compliance help businesses to assess and mitigate all such risks that a business might be exposed to in the future.
In today’s world, businesses have become more competitive than ever before. They face a number of different risks such as strategic and financial risks that compel them to dedicate risk management departments to stay ahead of their competitors and catch any discrepancies in processes at an early age.
Same is the case with financial risk.
If the discrepancies are not nipped in the bud, it could mean the death of your business. It is that top-priority risk that business simply can’t choose to ignore.
The most common factor that drives financial risk involves uncertain market movements. In the article, we will take a look at 5 such financial risks that every business should watch out for.
1. Market Risk.
Market risks involves an unexpected change in conditions of specific market in which your business currently operates and competes in.
One of such risks in recent times is the increase in the demand to shop online, leaving business operating physically with lower profits as most of their cash goes into rental shops that no longer reap profits.
This one change has significantly affected the way traditional retail shop operates. Larger corporations have been able to adapt to this change by making themselves virtually available but not all small and medium businesses can adhere to the change. Therefore, to them it could mean the end of their business. If they don’t, their chances to compete or let alone survive will die with them.
2. Credit Risk.
This type of risk is the one that is always there in the back of a business owner’s mind. It involves the risk of not being able to fulfil the obligations made with creditors, vendors, suppliers or any other counter parties.
This kind of risk can further be categorized into settlement risk and sovereign risk.
Settlement risk occurs when one of the parties makes the payment and the other fails to, while sovereign risk arises when foreign exchange policies become a hurdle.
3. Liquidity Risk.
This involves operational funding liquidity and asset liquidity risk. Operational funding liquidity refers to the daily cash flow of the company while asset liquidity refers to the relative ease with which a business can convert its assets into cash if there be any sudden need for substantial amount of cash flow.
4. Operational Risk.
Operational risks can be classified as any risk that arises from ordinary day-to-day practices by a company.
This category involves, lawsuits, the risk of frauds, business model risk and personnel problems which results due to inaccurate or inadequate marketing and growth plans of the business.
5. Legal Risk.
A legal risk involves a company facing financial loss due to any legal proceeding filed against it.
This could happen if a company fails to comply with and financial rules and regulations set the government. Failure to comply results in lawsuits and if found guilty, penalties. This constitutes the concept of legal risk.
What about you and your business? What kind of financial risks are you facing in your company?