Managing Risk on Financial Business Investment
Every business has some element of risk that can be a potential threat to its success. Risk management is the practice of assessing these potential threats and making sure you do everything in your power to maintain the upper hand. Before starting any business venture, always know exactly what you are getting into and be realistic. More importantly, see what you will have to do to maximize your chances of success.
Risk management is one of the most critical parts of any business activity. Risk management is the assessment of risks related to a product, managerial decision, or any other company policy. It is an essential aspect as it familiarizes the faculty with probable risks and also helps put up a backup plan in case of failure and worst case scenario conditions. Risk management involves avoiding the activities that will lead to uncertainty or threatening situation and if a threat does occur then having a mechanism in place to deal with it
Business continuity risks
These business continuity risks pose a threat to your business’ ability to remain operational. There should be a plan that will enable you to function with the minimum amount of disruption during a disaster or error of some kind; this plan should account for potential physical losses as well as factors like lost sales and production.
Below are some practical guidelines a person can implement to minimize risk in a business which is discussed under the following four tips;
Discipline can reduce risks in all aspects of the business. The discipline should apply to all aspects presented below as well as to the following:
Expenses should be kept under control, especially in times of affluence.
Debt assists a business to grow. A business with too much debt is, however, very vulnerable for liquidation in adverse conditions.
A lack of sufficient cash flow is a potentially fatal business risk. Cash flows should be managed diligently.
Business growth requires additional working capital. Uncontrolled growth can lead to financial distress and even bankruptcy and should be avoided.
The essence of hedging is to circumvent a potentially negative effect in business through an action, product, etc. Hedging is typical in the financial domain, but by working cleverly, it can also be achieved on an operational level. Some of the ways to hedge the operations of a business are given below:
To have back-up suppliers is a good practice. This keeps a company from being held ransom by an un-cooperative or out-of-stock supplier.
Any company should continually add new products to its offering. To rely on only a few good outcomes can be very risky.
In fact, it is worthwhile to consider different manufacturing plants. The risk on the business due to factors such as natural disasters and labor disputes is thereby reduced.
Back-up warehousing facilities and distribution channels are advisable.
There are successful businesses that had severe problems when they lost their biggest customers. Customer risk can substantially be reduced by having many customers.
Financial risk management is very prevalent in large international businesses. In case, you sell your products in the international arena, there are many products available to hedge the various risks. Risks that need to be catered for include currency, interest rate, and commodity price risks.
When companies evaluate risks they often forget about the human element. This is potentially one of the fatal risk factors. Relationships should be nurtured. Specific relationships that are important include the following:
Good relationships with suppliers are just as meaningful as with any other stakeholder in a business. It makes business sense to negotiate good credit terms with suppliers and to pay them as late as possible, but once an agreement is in place commitments need to be honored.
Customers should always receive excellent service and handle fairly and with respect. A large proportion of business usually emanates from existing clients. The specific lousy practice is to try and make a quick buck out of a client through very high margins.
Companies often pay lip service as far as the importance of their employees is concerned. Confidentiality agreements and restraints of trade can reduce some risk of unhappy or dishonest personnel, but it can never be as effective as a team of loyal and motivated employees.
Transparency and information are essential for investors and bankers. Nobody likes to be blindside or to get unpleasant surprises. To deliver more than what is promised is also a good practice. In difficult times financing can mean survival.
Relationships with all other stakeholders should also be kept in place. This can be the local government, governing bodies in the industry, service providers and others.
Detail planning goes a long way in reducing risk. The plan should include the following:
It is crucial to ascertain the viability of a new venture through a proper feasibility study.
A business plan gives the detail of how, when and by whom the strategic goals will be achieved.
Cash flow projections
Too many businesses go under due to cash flow problems that could have been prevented. It is essential to plan for anticipated cash in- and outflows and the timings thereof.
Proper financial planning covers many things including projected management accounts and the underlying ratios. Pre-emptive observation and correction of any potential profitability, liquidity and solvency problems reduce the risk of running into financial troubles.
Risk in business is a reality
When these risks are successfully managed, the rewards can be substantial. If not, a business can run into severe problems and even collapse. It is unnecessary to ignore risks. By adhering to a few fundamental principles, these risks can be reduced drastically.
It’s essential to have a robust risk management strategy in place to mitigate these risks, and one of the best solutions would be to secure the appropriate insurance for such risks. By carefully assessing each situation and understanding the business’s unique needs, you can arrive at the ideal insurance policy to keep these risks in check.
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