There are a number of risks when it comes to finance. Financial risk has a negative and
unexpected result, often due to market changes. Risks can result in a poor cash flow and
can result due to numerous reasons, including high debt from quick loans, inadequate management,
changes in interest rates, investments with high vulnerability and lack of information.
Market Risk
Market risk is one of the most important risks in finance. It is a result of supply and
demand, caused by uncertainties in the economy, which can cause a negative
performance for businesses. This is often a result in the variation in prices for liabilities,
assets and derivatives. Importers often are exposed to market risk, buying products in one
currency and selling them in another, which can result in devaluation.
Credit Risk
Credit risk is very important and needs to be taken into consideration with each
transaction, this is often referred to when a creditor may not receive a payment or they
may receive a late payment. Credit risk is a determination of the debtors ability to fulfill their
repayment obligations.
The two types of credit risk is to credit cards and home mortgages, while wholesale credit is when companies merge retail and wholesale. Retail credit risk is often smaller
businesses and individuals and relates or sell financial assets. Poor decisions when it
comes to credit risk can result in bankruptcy.
You also have to consider:
Risk When taking out a business loan – these can ruin a business before it’s got started.
Risk of Credit cards – Although it seems like free money when you’re younger, it can cause a lot of people stress spending money they don’t have then have to repay the card.
Risk of having bad credit – bad credit can cause a lot of stress, this page will cover the whole topic.
Risk of payday loans – 1000’s each week get caught up in the payday loan cycle.
Risk of direct lenders and brokers – see the difference between the two.
Liquidity Risk
In addition to the above, liquidity risk is a risk in finance. Every business should have a
sufficient cash flow to repay their debts. Failing to make regular and on time payments ruin
any investors confidence in the company. Liquidity risk is when a company may not be
able to fulfil their debt commitments, often as a result of poor cash flow management.
It is not uncommon for a business to have good equity, but a high liquidity risk, as they
cannot turn their assets into the cash flow needed to manage their short term expenses.
Real estate is an example of an asset which takes a significant time to turn into cash.
Businesses must verify what current assets they have to pay any financial commitments.
Operational Risk
Operational risk is also a risk in finance with different types. This type of risk is a result of
internal controls inside a company, such as human error, mismanagement, technological
problems and poor employee training. Operational risk is one of the most difficult risks in
finance to measure, which requires a history log of failures to recognise any connection
between operations and risk in finance.
The good news is operational risk can be avoided through identifying problems and
repairing or fixing them quickly to reduce any financial losses. This can eliminate
production downtimes, deliveries and reputation. Large corporations have experienced
serious risks in finance as they were not prepared for the operational risks that they were
faced with.
Legal Risk
The final risk in finance is legal risk, which is a financial risk that is due to legal constraints,
such as a lawsuit, for example. When a business faces financial loss arising from legal
proceedings, it is considered a legal risk. Often this type of risk is due to non compliance,
which can be non compliance to rules, regulations and laws of the government. Legal risk
for businesses can result in agreements, contracts, assets, litigation and intellectual
property rights, along with copyright violations.
Legal risks can result in financial and non financial losses to a business, from the
cancellation of orders or payments to loss of reputation and damage to the business
brand.
Each business faces different risks in finance based on their activities. Identifying risks and
assessing their impact can help reduce risk in finance moving forward.
