Risk is hereditary to any business, and risk management is an indispensable part of running a profitable business. A company's management has differing levels of control concerning varying risks. Some of these risks can be directly handled while other risks are beyond the company management’s control. Every so often, the safest thing a company can do is anticipate potential risks, evaluate the probable impact and be equipped with a plan to mitigate its adverse events.

Major Kinds of Financial Risks

Amongst all the other risks, the most crucial kind is financial risk. Finance is the backbone of all organisations, and it is imperative to have an effective risk management strategy in place to safeguard the financial interests of a business.

There are multiple ways to classify a business's financial risks. One such approach is dividing financial risk into four comprehensive threat groups – market, credit, liquidity and operational.

Take a look at the different types of financial risks that can have an impact on your business:

1.Market Risks

Market related financial risks involve threats of fluctuating situations in a particular market in which a business contends with other businesses. For example, consumer’s increased tendency to use online platforms for shopping has posed many challenges to the traditional retail model of businesses.

Companies that have adapted to the required changes to provide online shopping platforms for its consumers have prospered and witnessed a growth in their revenue substantially while companies that didn’t adapt to the fluctuating needs of the market have tumbled down the way.

This example also correlates to another aspect of market risk—the threat of being bested by rivals. In a progressively competitive global market, through reducing profit limits, most financially profitable companies are doing well in presenting exclusive cost proposals which distinguishes them from the crowd and facilitates a strong market identity.

2. Credit Risks

Credit related financial risks are the threats that a business incurs when it extends a line of credit to its customers. It can also denote the enterprise's own credit risk with dealers. A business holds a level of financial risk when it offers funding to its customers for purchases as there is a probability that the customer might make a default on payments.

It is imperative for a company to handle its obligations of credit by confirming that it always maintains an adequate cash flow for paying its account payable bills on time. If Not, sellers stop giving credit or stop doing business altogether.

While controlling risk is an essential part of competently running a business, the company management only has so much control to mitigate the related risks. In certain cases, the best a management can do is – anticipate possible risks and be ready.

3. Liquidity Risks

Liquidity related financial risks consist of asset liquidity and operational financing. Asset liquidity indicates the ease with which a company converts its assets into cash, when there is sudden need for a substantial amount of cash flow.

Revenue dips – general or seasonal, poses significant risks where the business unexpectedly finds itself with limited cash-in hand to pay off necessary business expenses that facilitate uninterrupted functioning of the business. Hence, cash flow management is crucial for achieving organizational success. Market Analysts and investors look at metrics like free cash flow when assessing companies as an equity investment.

4. Operational Risks

Operation related financial risks denote the numerous hazards that can be the outcome of a company's regular business events. The category of operational risk comprises threats by lawsuits, fraud, human resources and business’s operational model. Operational risks are those that make a company’s business models of marketing and growth incorrect and ineffective.

Important Takeaways

• There are four major categories of financial risk that most companies must cope with.
• Market risk is directly related to any substantial change in any specific marketplace where a business competes with other businesses.
• Credit risk is for those companies that give its patrons a line of credit and the related risk of maintaining sufficient funds for company’s payable bills.
• Liquidity risk denotes easy ways of converting company’s assets into cash, in case it needs funds. It also describes a company’s daily cash flow.
• Operational risk occurs as an outcome of a company's routine business pursuits such as fraud, litigations and human resource issues.

How TRC Corporate Consulting Can Help

At TRC Corporate Consulting, we help you turn complex financial risks into prospects for growth, flexibility and long-term benefits. We challenge the traditional approach of financial risk management by restructuring and tailoring the model, emphasis and competencies of a standard financial risk framework.

The result? Organizations connect with TRC to execute and implement financial risk management programs to gain competitive lead, a stronger brand reputation and sustainable financial yields. Join hands with us and be our valued partner for any financial risk management requirements. If you have any queries or need any understanding of our services, contact us now!