How to manage financial risk?
Financial risk can be defined as a loss of money that may occur after the completion of a financial or business transaction: capital investment, loan, stock market investment... Moreover, with the current financial instability, financial risks are more increased.
The different types of financial risk
Financial risks are not attributable to the company, but are linked to external events. To learn more here is this article click for info. Volatility risk relates to interest rates, exchange rates, share prices, commodity costs, etc. The effects directly impact financial investments. Credit risk is the risk that debts will not be repaid (due to bankruptcy of the borrower, change of situation, etc.). Operational risks also have an impact on the company's cash flow. These can be industrial, technological or economic risks. For companies that invest abroad or use foreign currencies for transactions, there is what is known as "exchange rate risk", linked to a sudden rise in the value of the currency. Interest rate risk mainly affects borrowers. Indeed, it is quite possible that the credit rate will increase, which will indeed impact their finances.
Financial risk management
In order to reduce a company's liquidity risk, it is very important to put in place a forward-looking cash flow plan and monitor its cash positions on a daily basis. This is essential. If necessary, it is better to plan a back-up solution to get out of an impasse, such as a bank overdraft authorisation or a loan. Variations in financing rates can also have serious repercussions on a company's results (mainly affecting companies borrowing at variable rates). The situation in the financial markets should therefore be constantly monitored and a project should be carefully studied before concluding or interrupting a loan or investment contract. Moreover, it would be wiser to opt for a fixed rate in order to minimize the risks.