Why is it important to analyze financial risks?
written by Deicy Pareja, On May 29, 2020
In order to embark on a business endeavor, it is first necessary to know the financial risks faced by the company in order to be prepared for any contingency and remain relevant in the market.
If an organization does not prepare a risk analysis to assess threats and impacts, it will not be able to react in time, let alone prevent any event that would have negative effects such as damaging the company's image or even leading it to bankruptcy.
There are many challenges to be included in the analysis and that is why it is important to help yourself with risk management software that detects in real time and provides warnings about possible contingencies in order to take preventive measures and keep the company on the right track.
This software is very useful and has many advantages that can save a company's life: it helps to reduce the manual tasks of the operations and it performs a more accurate and real analysis of the threats.
Identify threats early
Without a doubt, detecting risks in time is the first thing a manager must do; after studying the threats, he/she will have an in-depth understanding of the factors that could lead the company to suffer losses, and such knowledge will be decisive in decision making.
When risks are analyzed, they are mitigated, and this avoids heartache among members of the organization, investors, or customers. That is the importance of not making blind decisions, without knowing what will happen in the future.
For this reason, it is essential to anticipate the future; it is not a question of predicting it, it is about having an analysis, information and in-depth knowledge of the threats and zooming in on what may happen and designing assertive strategies.
Another strategy to mitigate risks is to plan investments that balance high-risk actions with low-risk actions. Also, if you know the threats, you can purchase an insurance policy and thus minimize losses in case of an event.
Financial risks increase when there is high debt, changes in interest rates, mismanagement, market operations, investments with a high degree of uncertainty, as well as lack of information for making wise decisions.
Don't forget to study these risks
The analysis should include market risk, which moves according to supply and demand, as well as price variations and the behavior of the dollar or euro. This not only impacts your company, it can also impact all those in your sector.
For example, if a company from the flower industry imports flowers into the U.S. and the dollar goes down, that immediately impacts the company and could affect its financial obligations.
Another example that can alter the market is the era of digital transformation: Uber impacted the taxi business and the Airbnb app impacted hotels.
Credit risk refers to when a customer, whether a wholesaler or retailer, does not pay a loan or is late in his/her payments. This can be avoided by a study of customer creditworthiness.
There is also liquidity risk, which means a company's failure to fulfill its obligations. That is why you have to make sure there is enough cash flow to pay off your debts. Otherwise, you will not only be up to your neck, but you will also cause mistrust among your investors.
Finally, consider the operational risk, which is triggered by internal turmoil, mismanagement, technological failures, lack of maintenance and human errors, lack of training or pressure to deliver results.