The essence of any business is to ultimately produce offerings that multiply the cost to produce them; profits essentially. Hence, the ongoing market fluctuations, ever-changing consumer demands, rising debts due to over-intensive competitions in every vertical, increased security and legal complications have all created multiple risk factors to a business’ finance management. Firms or enterprises emphasizing on risk strategy management are increasingly hiring enterprise strategic risk management consulting firms or specialized financial risk advisors to help drive streamlined growth and profitability.
Here are some common types of financial risks faced by businesses of today—
Ripples of market uncertainties have been taunting businesses all over the world for years now. Worsening international trade relations, socio-political factors, all are playing a major role in creating troublesome economies and a risky global value chain. Needless to say, globalization has created business supply chains that cross national borders and such market uncertainties only create more financial problems for firms.
One legal battle can heavily drain a firm’s financial resources. Patent battles, compliance regulatory risks, location-specific trade policy-related breaches, the entire segment of legal issues in business is too complicated and it can have catastrophic impacts on businesses. Unsurprisingly, many firms hire enterprise strategic risk management consulting firms just to manage their legal risks and the financial woes they bring along.
Investor Credit Risks
Often firms try to grow big and enhance their market grasp through hefty investments from investors, banks, private equity firms etc. In most cases, there are proper timelines regarding when the credited amount would be paid back. After expanding operations and spending those huge chunks of money, if they still aren’t in a position to pay back the credit amount, it’s a red alert for the company. Either they can now bet big and grab a bigger investor who would meet these problems and charter them to success routes, or engage in asset sales etc to meet the creditors’ demands.
Operational Financial Risks
This can happen if the firm’s inward revenue cannot sustain its daily operations. A lot of risks in operations such as supply chain management, resource management, infrastructure management can result in the loss of huge amounts of revenues until there are proper risk plans in place. Operational risks are some of the most commonly occurring risks in a business and it in huge financial burdens if not taken care of at the earliest.
Data hacks, security breaches, information piracy, these are some of the most disastrous risks that can happen to any company. For instance, every company stores huge amounts of raw data on products, employees, etc. Any breach in that can severely impact the firm’s reputation and they might be dragged on to the court to give hefty compensations. Not to mention, these majorly affects their market posture too which affects overall sales and hence revenue.
This can happen if a company is unable to produce the necessary cash when required. An example can be in the inability to sell assets when required and get liquid cash to mitigate debts, fund necessary investments, payback shareholders’ money, and more. A milder form of liquidity risk can also be when a business can sell its assets but at the cost of its capital (loss-making asset sales).
The above, hence, are some of the traditional financial risks that 21st-century businesses face. Finance management being at the heart of a business’ operations, any risk in the same is bound to have over-arching repercussions. Hence, identification of all the risks, monitoring the same, and having adequate plans to ensure business continuity while the risks do occur is at the core of enterprise financial risk management.