Any enterprise, business or investment faces some form of risk. It’s only natural in a business setting that managers and entrepreneurs cannot foresee everything. Sometimes, things happen outside of one’s control that could result in losses for the company. This could include changes in market preference, introduction of new competitors, changes in the economy, and even natural disasters.
It is, therefore, important for a business manager to understand these risks, and learn how to avoid, mitigate or deal with them, no matter what form.
For a business, financial risk usually comes in several forms. Here are some common risks that a business or entrepreneur would usually face.
Capital risk is the possibility that money and other assets invested into an endeavor might be lost. While any business foresees a break-even point some time after being established, some simply do not make it past
Currency risk is the likelihood that the currency that your business primarily operates in might fall in value with respect to another. This is particularly troublesome to businesses that deal with export or import goods.
Credit risk is the likelihood that a borrower might not be able to settle his dues, and whether he can pay on time.
Liquidity risk is a problem in which the business might have assets that are difficult to convert into cash.
Any business manager should be aware of the risks that his company faces. While there is no way to completely foresee events that will happen in the future that would affect business, a manager or entrepreneur should be aware of several factors that might affect his business directly. Here are a few examples.
Assets. Businesses have assets. However, these are in different forms. A business manager should ask himself whether these assets are in liquid form or not. If the make-up of the company’s assets is built up on items that are difficult to sell or monetize, then the company is said to have high liquidity risks. Banks and financial institutions might have difficulty lending money to such businesses if they plan to use the assets as collateral.
Investment portfolio. Corporations and individuals usually invest money in various instruments, including stocks, bonds, mutual funds and the like. However, investing all of one’s money into a single stock or fund might be too risky. A good fund manager knows how to distribute these investments such that the value of one’s investment is not too much affected should one sector or industry fail.
Paying capacity. For banks and lending institutions, there is such a thing as credit risk, which is essentially the risk they take whenever they lend money to individuals and businesses. There is always the risk that the borrower will default on his loan. There are a few ways of recovering this money, though, such as receivership, foreclosures, and the like.
Financial risk is part of any business. Therefore, while risk cannot be totally eliminated, a good business manager should have the foresight to minimize these risks early on. Risk cannot be avoided, but it can be managed properly by making the right investment and management decisions.