Financial Risk (What it is, Types of Risk and ways to reduce it)

In the business world knowing how to financially manage the company is vital for its development, to do so efficiently it is necessary to be clear about the rfinancial risk to which the company is exposed.

If this type of risk is not considered and valued with caution, the company can have significant losses, it is important to note that every company is exposed to risk financial, whether you are starting your manufacturing or service, or have years in the business, since the probabilities of events cannot be controlled in a framework external.

What is Financial Risk?

When talking about financial risk, it refers to the probability of certain events occurring that may affect the stability of a business or company, which would generate a considerable impact on the financial statements of the company, these risks are inherent to the business, however with controls the level of risk.

It also refers to the uncertainty about the returns of certain investments or financing that the company has incurred, given that due to various internal or external factors, the return on the investment may not be as expected and, on the contrary, may have a lesser or lower effect. negative.

What is Financial Risk?

When the owners of the company are in charge of making an investment in shares of a company, they buy fixed deposits in the market hoping to recover the capital plus interest, or acquires financing through a bank or other financial instruments is exposed to an unavoidable risk that this money may not return in the way it has been projected.

This risk is tacitly found in most of these transactions, given various factors in the market, they can affect the operation of the business, the liquidity, of this In this way, financial risk can stop the payment of financial obligations, or the recovery of the capital invested in a financial instrument for which a cost effectiveness.

Types of Financial Risk

The fact that financial risk is present as a probability in the different transactions carried out by the company makes it difficult to quantify the number of financial risks may exist.

However, these risks over the years have been systematized and classified in such a way that depending on the item or the Activity of the company that impacts can be categorized, for this reason, below we detail the types of risks one by one financial:

Market risk

Market risk is one of the best known and refers to the probability that a loan portfolio will be impaired, both for investments as well as for businesses, this risk would generate an estimable impairment of the value of said portfolio, generating a new much lower amount or loss of an active.

This risk has as its main risk factors a change in interest rates in these portfolios, there are also changes in the value of one currency in favor of another, that is, an increase in the value of a foreign currency and national currency that conditions the value to recover the value with which the transaction was made, which is usually evidenced in the inflation.

Finally, there may be a change in the supply and demand of certain financial instruments, as usually occurs with stocks in the market. stock market, whose value may increase or decrease depending on the reputation and demands of the shares in the market.

Operational risk

Operational risk makes mention of those problems that may arise in the daily activities of the company, this impact is difficult to quantify given that it results from the capacity or lack of trained personnel to carry out their work and the levels of controls that the company has to reduce the risk of error.

This risk is the most controllable since it is largely based on the internal structure of the company and on the knowledge of its daily operations.

Liquidity risk

Liquidity risk is one of the most complex for a company since it determines the inability to trade both in the sale and purchase of its assets.

By presenting a deterioration in the portfolio and in the working capital of a company, its ability to meet the obligations and liabilities of the company is limited.

Credit risk

Credit risk is the expectation of the cash flows that the company expects to obtain from a transaction, the fact that one of the parties cannot meet the obligation payment can generate setbacks and losses in the company's ability to project the payment of its suppliers, negotiate new investments or pay its employees.

Legal risk

It is a financial risk associated with the change of laws, policies or governments within the country or the country with which import transactions are carried out or export of products or some services, this generates high levels of uncertainty that can harm the results that the company hopes to achieve. company.

How can financial risk be reduced?

In order to reduce risk, the company must implement analysis and a structured scheme for financial risk management through the taking of decisions by management that take into account the possible losses that can be generated when making various investments and transactions. Some examples can be:

• Analyze in detail the financial information and the profitability offered by a financial instrument and its market price, in addition to the historical behavior.
• Diversify investments in a portfolio of securities that bets on different items, so that if their values ​​fall in any of them, the others can sustain the investment and reduce the loss.
• Analysis processes and internal management of the company, linked to logical and human analyzes that allow to foresee situations that are under the control of the company.
• Invest in training related to understanding finance and current market behavior.

Thanks for your reading! Remember to share with your friends and leave us your comment if you liked the post.