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Financial Risk Management

Financial risk management

Financial risk management is among the most important aspects of running a business.

It involves identifying, assessing, and prioritising various financial risks that a company might face, such as market fluctuations, credit and supplier risks, liquidity issues, and operational uncertainties.

Understanding and managing your company’s financial risk can help ensure its long-term success by safeguarding assets, ensuring stable cash flow, diversifying, and enabling informed decision-making in both daily operations and strategic planning.

This proactive approach not only minimises potential losses but also positions the company to capitalise on opportunities and adapt to changing economic environments.

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What is financial risk management?

Financial risk management is a critical aspect of your business strategy, involving the identification, measurement, and mitigation of the financial risks a company or organisation might face.

It is an essential component of any business or organisation because it helps to safeguard assets, ensure financial stability and support sustainable growth.

Effective financial risk management involves not only recognising potential threats but also developing strategies and controls to minimise their impact.

Financial risk management can be applied to various types of risks, including credit risks (the possibility of defaulting on a loan), market risks (such as fluctuations in currency, interest rates, or stock prices), operational risks (risks arising from internal processes, people, or systems), and legal risks (potential legal liabilities or regulatory penalties).

How to manage financial risk?

There are many ways to manage financial risks, and the most suitable approach depends on your business’s unique needs.

Businesses often use a combination of quantitative methods, such as statistical models and financial analysis, along with qualitative assessments to evaluate and manage risk.

Some tips include:

  • Understanding your contract negotiations, terms and conditions is crucial for managing contract claims and potential disputes.
  • Understanding all key financial metrics, tracking them on a monthly basis, including revenue, Gross Profit Margins, EBIT, EBITDA and NPBT.
  • Keeping a close eye on your cash flow and measuring the level of debt in the business assists to manage cash flow pressures.

By taking steps to proactively manage your financial risks, you can help ensure the stability and success of your business.

Types of financial risk

Types of financial risks businesses may face include credit, liquidity, market, and operational risk.

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How Ledge can help you manage your financial risk

At Ledge, we adopt a holistic approach to business finance to ensure businesses appropriately manage potential financial risks.

We collaborate with several experienced risk management and tax consultants who have helped many of our clients to effectively manage their financial risks.

Get in touch with the Ledge Finance team today to speak to a risk management or tax consultant about managing your business’s financial risks.

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FAQs about financial risk management

Our team answers some frequently asked questions about financial risk management.

There are several different approaches when it comes to financial risk management. The key is to find an approach that best suits the needs of the particular business or organisation. One popular approach is known as enterprise risk management (ERM). This approach focuses on identifying and managing all risks that could potentially impact the business, not just financial risks. Other approaches include value at risk (VaR) analysis, stress testing, and scenario analysis.

6 types of financial management include:

  1. Financial planning
  2. Budgeting
  3. Forecasting
  4. Financial analysis
  5. Risk management
  6. Capital management

There is no one-size-fits-all answer to this question, as the most effective approach depends on each business's unique circumstances.

Common methods for identifying financial risk include performing a SWOT analysis, examining financial statements, and seeking advice from industry experts.

Techniques for managing financial risk include a variety of strategies such as:

  • hedging, which involves using financial instruments like futures and options to offset potential losses;
  • diversification, which spreads investments across different asset classes, sectors, or geographical regions to reduce exposure to any single risk; and
  • insurance, which provides a safety net by transferring risk to an insurance company.

These methods help individuals and organisations minimise potential financial losses and enhance their overall financial stability.

Some other types of risks that may affect businesses’ financial management include:

  • contract risk,
  • legal risk,
  • inflation risk,
  • foreign exchange risk,
  • interest rate risk,
  • supplier risk,
  • geopolitical risk,
  • and more.
More questions? Contact us

Disclaimer

Please note the information provided here is general in nature and does not constitute financial, tax or other professional advice. You should consider whether the information is appropriate for your needs and seek professional advice prior to making any decisions.