Understanding Enterprise Risk Management and Financial Risks

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Financial risks are one of the most important enterprise risk that a company must deal with. Financial risks, by definition, are all possibilities (variants) that can cause a person or company to lose money, whether through various financial transactions or investments. Basically, these risks will always exist in any transaction that involves money. So it is important to recognize them and know how to minimize them. 

Imagine that you are planning to open a new business , for example. There is always some chance that the investment will not give the expected return, right? This is part of the financial risks of your investment. 

Another example that makes it easy to understand what financial risks are is the devaluation of a good or product. You are not always able to pass on a purchase for the same amount you spent to acquire it, and this is a financial risk you take during the transaction. 

Financial risks are also often linked to poor financial management , as lack of information is a major cause of indebtedness. This, in turn, is often a consequence of not calculating the financial risks of transactions and investments. 

The financial risks of a company 

A company’s financial risks, for example, are directly linked to the investments it makes, in addition to its own financial and organizational flow. 

There are several types of financial risk managment software that need to be analyzed before an investment, but the rule for considering whether or not to invest in a certain business or market is always the same: the greater the financial risks, the greater the chances of losses. Therefore, the risk needs to be offset by the possibility of gains. 

5 types of financial risks 

To know how to analyze the possibilities and security for an investment, whatever it may be, it is necessary to identify what financial risks exist, always in order to minimize them or avoid any surprises. 

Financial risks, in the case of investments, for example, can be classified as: credit risk, liquidity risk and market risk. Learn more about them below. 

1. Credit risks 

Credit risks are known to be the most common, since this alternative is linked to the possibility of someone not being able to comply with the financial commitments assumed. That is, if someone fails to pay you, be it a rent, the installment of a loan, a purchase, etc. 

To assess credit risk, do what banks and financial institutions do when assessing whether or not a customer will have available credit. They never lend money to those who already have outstanding debts, for example. 

The important thing here is to carefully evaluate the credit risks of an investment and the possibilities of return to make the best decision, according to your investment profile and your risk tolerance. 

2. Liquidity risks 

In investments, liquidity risk also represents the ease or difficulty of redeeming the money that has been invested, without it losing its value. Some investments can be converted into cash more quickly than others and this is the liquidity risk. 

Selling a property can take time, right? Money placed in savings can be redeemed at any time. Understanding what the best option is depends on many variables, especially on what your long-term intentions are. 

In personal and / or company finances, liquidity risk is also about your own ability to fail to pay what you need, be it debts, employees, among other expenses. This risk is highly linked to the mismanagement of company finances, which is why, unfortunately, it is also quite common. 

3. Market risks 

Market risk is linked to fluctuations that occur on the stock exchanges, being related to the shares of companies, currencies, commodities and economies (national and international). 

Remember that all price changes can affect your personal pocket, such as interest rate changes. And these variations can also influence your company’s profit or loss, if you are an entrepreneur. 

Therefore, always assess the fluctuation of the market and consider these risks in your financial decisions, whether as an individual or a legal entity. 

Other risks 

When we talk about companies, it is also possible to highlight two other risks that, although not financial, can directly impact corporate finance. Whether you are an entrepreneur or just an individual investor, it is worth knowing them too. 

1. Operational risks 

Operational risks correspond to losses that can actually be caused by a failure in the operation of an activity, that is, by an error. This error can be human, but it also involves systems, events, processes, and many other factors. 

Although this is one of the most difficult risks to design, it gets smaller when everything is well planned and organized. As it can also be caused by internal or external fraud, knowing with whom you do business or financial transactions is always a way to avoid unpleasant surprises. 

2. Legal risks 

Legal risks are linked to non-fulfillment of agreements or promises, which were made exactly without legal support, that is, without guarantee of justice or any legal means. This is often the case with agreements made by word of mouth, without a signed contract, for example. 

Certain offers that promise quick profits or similar situations also always have a high legal risk. Thus, the best way to avoid legal risks is always by relating to authorized and regulated institutions. 

It is important to note that financial risks will always exist in any investment and financial operation. Therefore, there is no way to get rid of them, but take the necessary precautions to avoid damage. 

Some cases are simple, such as requiring contracts and guarantees, especially in cases of leases and other such negotiations. In others, it is best to study the situation before actually investing the money, in addition to consulting experts in case of doubt. 

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