A business venture can face financial risks in different ways. Some may be internal while others may be driven by external factors such as inflation or exchange rates. But financial risks can also include non-payment from clients, or poor financial planning and projection. All those risks can lead to one thing: loss of income, which if serious enough, can mean an end to your business.There are many ways to categorise company’s financial risks. One way is by separating financial risk into four broad categories, mainly: market risk, credit risk, liquidity risk, and operational risk.
Let’s define each.
- Market risk
Market risk involves the risk of changing conditions in the specific marketplace in which a company competes for business. One example being, the aspect of market risk when public schools decide to use ebooks which may present significant challenges to schools books publishers.
2. Credit risk
Businesses incur credit risk by extending credit to customers. Those customers may default on payment. The same applies to company’s own credit risk with suppliers and banks.
- Liquidity risk
Liquidity risk includes asset liquidity and operational funding liquidity. While asset liquidity refers to the relative ease with which a company can convert its assets into cash should there be a sudden, substantial need for additional cash flow.
- Operational risk
Operational risks refer to the various risks that can arise from a company’s ordinary business activities. The operational risk category includes lawsuits, fraud risk, personnel problems, and business model risk, which is the risk that a company’s models of marketing and growth plans may prove to be inaccurate or inadequate.
What is risk management?
CIMA defines risk management as the process by which organisations methodically address the risks attaching to their activities in pursuit of organisational objectives and across
the portfolio of all their activities.
How do accountants assist with risk management?
Accountants should be leaders in enterprise risk management, by advising business owners and board members about top risks and by having plans in place to offset the effect of risks on an organisation.
One way of how accountants can help business owners by coming up with a comprehensive risk management strategy
that will protect assets, finances and operations of their business.
The key thing in managing the risk management system is identifying the potential risks that are out there, and what other controls that can be utilised to mitigate those risks
The Importance of Risk Management
Risk management is vital because without it, a business cannot possibly come up with objectives to meet future needs. If a company defines objectives without taking the risks into consideration, chances are that it will lose direction once any of those risks hit home.
Risk Management Plan
If your business doesn’t already have a risk management plan in place, then here are the steps in how you can create one:
Step 1: Identify Potential Risks
Spend time identifying the specific risks faced by your own business. While some risks are universal, others may only apply to certain sectors . Always involve accountants to ensure that every aspect is covered.
Step 2: Conduct Risk Analysis
Once you have identified your business risks, you will need to analyse their potential impact and their likelihood of occurring. This will enable you to know which risks are urgent and which are not.
Step 3: Identify warning signs early
A key part of preventing risks from occurring is to be able to spot them when they’re about to happen. Identify any triggers or warning signs early on and save a lot of money.
Step 4: Identify preventative measures
No risk management plan would be complete without identifying measures that you and your business will take in order to prevent them from happening.
Step 5: Assign responsibility
Lastly, each risk that you have identified should be assigned to someone to manage. This person will be accountable for ensuring that any processes laid out in the risk management plan are carried out.
If you are looking to tackle risk management through bookkeeping and accounting outsourcing as one of the strategies, MGT should be your first choice.