Advivo explains the value of a financial risk analysis, and how your business can benefit from one.
Identifying and managing financial risks to a business is an important step in a business’s financial management process. This includes conducting a risk analysis at least once a year to understand and avoid potential future situations that can negatively affect your business’s earnings.
What are financial risks?
Financial risks are future potential situations that can cause a business to lose money, or can negatively affect a business’s cash flow, which in turn affects the business’s ability to meet financial obligations.
Financial risks can be caused by an uncertain market, legal liabilities, loans from investors, or even disasters natural or man-made.
Businesses that have a large debt will have greater financial risk than businesses with smaller debt. But it’s important to note that all businesses have the potential to face financial risk.
Types of financial risk
The main types of financial risks include:
- Credit risk – This risk arises when you extend credit to your customers (e.g. allowing customers to pay for a good or service on a later date), or when you yourself borrow money and aren’t able to meet repayments.
- Foreign investment risk – This risk is the amount of loss likely to occur when investing in countries outside your country of operation.
- Liquidity risk – This risk is about your ability to repay debts when they’re due. This directly correlates with cash flow management.
- Leverage risk – This risk relates to your level of business debt and your ability to repay them.
- Cash flow risks – This risk is the event when all cash received within a given period is less than all expenditures and debts.
Why managing financial risks is important
A business cannot be completely removed from financial risk. These risks have the future potential to cause a business to lose money and affect cash flow.
Identifying financial risks will help you categorise risks into types, as well as outline potential consequences. Analysing financial risks allows you to understand the significance of each risk, and help you measure the likelihood of the risks occurring.
Identifying and analysing potential financial risks will in turn help plan and manage each financial risk, allowing you to choose whether to avoid, accept, or mitigate certain risks.
How can Advivo help your business?
It is important to manage your financial risks as it can negatively affect your business operations and cash flow. Our financial management and modelling services are designed to help you understand the financial performance of your business. Along with our financial management services, we offer financial modelling to prepare your business for real-world financial situations. This is essential in understanding any potential risks and rewards of significate projects you might be considering.
We also offer a Monthly Service Program (MSP) which was devised to help your business improve financially and remove the stress associated with end-of-year accounting and outgoing obligations. This includes monthly meetings to review your business’s financial progress and to make any suggestions on how you can improve.
Please contact our professional advisors at Advivo to assist you with identifying and managing any financial risks your business could face.
