Financial Risk Management for individuals
Learn more about the different categories of financial risk management. Discover different methods to assess and address financial risks.
No matter what your profession, financial risk is unavoidable. Financial risk broadly refers to anything that causes money to flow in or out of your business. For example, if you choose to buy new equipment for your business, the financial risk involved is the total cost and upkeep of the equipment will be less than the increased profits from the new items. Because there are so many financial risks associated with running a business, financial analysts divide the risks into multiple categories.
Financial risk management refers to a process where you identify the risk behind each of your decisions. There are two types of risk management, internal and external. Internal risk management involves assessing your business decisions, such as whether introducing a new product or service is worth money. External risk management occurs when you ask a third party, such as an investor or fund manager to support your business.
Market risk refers to any sort of risk that affects your physical business. For example, a common risk for many new businesses is whether a physical store can compete with the number of online marketplaces. When assessing this risk, you must come up with a way to make your store stand out from the online crowd, as well as similar businesses in your area. Many stores use memberships or offer in-store only discounts to entice customers to directly visit the store. While this can work, you must weigh how much you are losing in profits by continually running sales.
Credit risk focuses on payment and contract plans. Many stores allow customers to setup payment plans for pricier items or services. The risk is, if the customer does not pay, are you able to recoup the losses? There are legal options to help you collect what is owed to you, but in many cases, these services cost more than what you are getting from the customer, resulting in an overall loss. Even if you are confident your customers will pay, you must decide if your business has enough upfront money to stay in business while waiting for customers to pay off their contract. This is especially important for newer businesses that do not have as much money on hand.
Liquidity risk is sometimes referred to as funding risk. This covers any sort of risk associated with trying to sell business assets or raise funds. A common example is tourist businesses. These businesses make the most money during tourist seasons, but see significantly less sales outside of these periods. These seasonal businesses must decide if they make enough during these busy periods to keep the company going during the slower months.
Some businesses address this problem by offering different services based on the time of year. For example, many landscaping companies offer snow removal services during the winter months, when it is too cold or snowy for traditional landscaping services. Some restaurants cut hours outside of tourist seasons or greatly limit their menu.
Operational risk covers all your day-to-day operations. This includes payroll costs, inventory management and general budgeting. If you are planning to run a sale, operational risk involves budgeting how much you will make after reducing prices, advertising costs to inform customers about the sale or increased costs of having more employees on hand during the sale. If you want to promote an employee, you must consider payroll costs, how long it will take to fill the employee’s old role or whether you need to train a new employee.
Financial Risk Management
There are many ways to assess financial risk. Assessing financial risk involves many factors, which greatly change from business to business. What may be a large financial risk for one business is considered safe for another. Your methods for assessing financial risk may also vary based on your business and your concerns.
Determining financial risk is not something you need to do alone. Whenever possible, work with your accounting team and managers to determine all the possible risks. Go over how much money you have on hand, and how much you can reasonably afford to use. Make a list of all the resources you will need to succeed. You can also use risk management software to help you stay organized and identify potential risks.
One of the issues with financial risk management software is many programs are clunky and difficult to use. nTask has a sleek user interface, which makes it easier to input and track financial information. This keeps you from being overwhelmed with information, or miss inputting important details. nTask also allows you to assign different areas to multiple users, so everyone can make a report without stumbling over each other. The basic program is free and supports up to five members, while the premium plan costs $2.99 each month per user.
Resolver is both a risk assessment and organization program. You can build your project directly in Resolver, receiving real time risk assessment as you make changes to the project. Resolver will automatically generate reports and summaries, with multiple presentation options available. You can also compare different projects to determine which is riskier. Users can make notes on the reports to suggest methods for reducing risk. Resolver offers custom plans after a free evaluation. You can also request a free demo before agreeing to any plans. While the cost varies based on your needs, Resolver is known for being more expensive than other risk assessment software.
Integrum is one of the oldest and most reliable risk assessment programs. Many businesses prefer integrum because it offers so much customization. You can individually configure each of your project. There are also special preset configurations for health and safety management. This allows you to track less common issues, such as governance risk. You must contact Integrum directly for a quote.