Importance of Financial Risk Management in an Organization

By Sthitaprajnya Panigrahi Friday, 03 January 2020

For a business enterprise, financial stability holds the utmost priority cementing its position and stature in the corporate sector. Companies are not shying away from hiring individuals having proficient expertise in the financial management domain, who can not only track the transactions and cash-flow of the organization but also protect the organization from any possible financial risks. Apart from that, they also acknowledge the budding opportunities surfacing on the corporate sector, which can reap huge revenue on investment.

Financial Risks:

The risk which emerges as a result of improper management of cash flowing in and out of business can be termed as a financial risk. Proving a hindrance in revenue generation and debt management, financial risks can be an obstacle in the growth of the business eventually leading to its downfall.

The potential causes which are majorly responsible for creating financial risks for an organization are listed below:

  1. The financial market is volatile in nature and prone to ups and downs depending on stocks, shares, currencies, and fluctuating interest rates. As a result of this unsteady nature of the market, many business organizations and investors face losses.
  2. The sudden disappearance or arrival of new competitors in the market can create a financial jeopardy situation for business.
  3. Changes in economic factors or the intervention of government introducing or abolishing certain laws can raise serious issues of financial risks for business enterprises.
  4. The failure in the internal factors of a company such as defective workforce management and lower productivity can often expose the company to financial risks.

Management of Financial Risks:

To address the issues arising from the above-mentioned scenarios, companies opt for financial risk management. It includes strategies, proper planning, and implementation of innovative practices along with following certain guidelines to tackle the issues related to the financial crisis emerging in the upcoming future. The major activities comprise of:

1. Identifying the source or cause of financial risks:

The most common type of risks that the company is exposed to can be mentioned as liquidity risks, operational risks, market risks, credit risks, risks related to foreign exchange and interest rates. By taking the necessary steps related to assessment and risk management, all the above-listed risks can be minimized to a greater extent.


2. Analyzing the impact of the financial risks over the company:

As the market is volatile in nature, it is necessary for the company to analyze the severity of the risk and whether it is bearable by the company or not. This can be done by calculating financial liquidity ratios, credit exposure, the returns and investments of the organization along with an overall estimation of losses.


3. Preparing plans and strategies to mitigate the risks:

Depending on the type of financial crisis, strategies are needed to be prepared by the company to handle the issue effectively. It should also ensure the implementation of the strategies and monitor it closely to track the progress.

Financial risk management is an important factor and demands the maximum attention of the organization. It does not matter whether the company has just started or been a key player in the industry. Every business organization should be alert to recognize the financial risks and take possible preventive measures to mitigate them.


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