Companies or businesses face various types of risks during their lifetime. Identifying and dealing with these risks is crucial for the long-term survival of those companies. While there are some risks that may not occur often, there are some others that companies must manage continuously. Among these, financial risks are prevalent.
What are Financial Risks?
Financial risks represent the possibility of losing money on investments or projects taken up by companies. These come from uncertainties related to the decision-making regarding investments. They can result in the loss of capital for companies and their stakeholders. However, companies aren’t the only entities that must face financial risks.
Public entities, such as government bodies may also have to deal with financial risks. For these entities, financial risks represent the uncertainties related to the control of their monetary policies. Similarly, it may come as a result of a default on bonds or other debt issues. For government entities, financial risks come as a direct result of their finances or investments.
For companies, on the other hand, financial risks may come from various sources. For example, failures within a company’s operations can result in the loss of profits and lead to capital losses. Similarly, financial risks can come from within or outside the company. There are various types of financial risks in business that companies must identify and mitigate.
What are the types of Financial Risks in business?
As mentioned, financial risks may come in various sizes and shapes. While there are several types of these risks, some of the most prevalent ones are as below.
Market risk is the risk of changing conditions in a marketplace in which a company operates. Another name for market risk commonly used in investing is systematic risk. Various types of market risks can affect a company’s performance. These may include interest rate risks, commodity risk, or currency risk.
For each type of market risk, companies must have proper responses. Since the risk depends on a specific company’s situations and processes, market risk can differ between companies.
Credit risk comes as a direct consequence of a company’s credit system. When a company makes credit sales, it also undertakes credit risks. These risks come in the form of bad debts when customers fail to pay their owed money. Companies can also make credit purchases from suppliers. Therefore, credit risks also include risks related to those credits.
Liquidity risk relates to the liquidity of assets or operational funding. This risk usually relates to the company’s cash flows or working capital. Since these are vital aspects of a company’s business, liquidity risk can prevent companies from making profits. For some companies, liquidity risk may be higher than others due to the nature of their operations.
Financial risks consist of risks related to a company’s investments or projects. These can result in capital losses for a company. There are several types of financial risks in business. These include, but are not limited to, market, credit, and liquidity risks.