Effective financial management involves identifying and controlling risks. It includes doing an annual risk analysis to recognize and prevent possible circumstances that can negatively affect the profits of a company. Financial risks are possible occurrences that can lead to monetary losses or cash flow issues that can undermine the capacity of a company to fulfill its financial obligations. Every company must know the potential for financial risks and must hire reliable CPAs accounting services to help them manage these. Financial risks include the following:
Credit Risk
Small businesses frequently face credit risk. Customers may not pay on time, causing cash flow issues for companies. Sadly, bank loans do not address the issue. As a result, a business can have difficulty meeting a bank’s credit standards.
For instance, a bank might demand a long track record of profitability. Also, it may request collateral through fixed deposits, real estate, or equipment. Pledging these assets can put a company’s liquidity at risk. Thus, it can try to lessen its risk at the expense of another risk.
Liquidity Risk
When cash is locked up in some areas of a company, the latter can be at risk of liquidity. Thus, the business cannot fulfill its debt obligations. Some companies can have a high inventory of some products because of significant projections from clients. When the order is canceled after the client defaults, the unsold inventory can be money lost until it is put to good use. At the same time, the company has to pay its debt. Their only option might be to sell what’s in the inventory at a discounted rate.
Before business leaders make decisions, they must carefully study the highly cash-intensive business. To ensure they don’t have problems paying back their short-term debts, they must manage their cash flow properly. This should be done by first paying attention to the liquidity of the company.
Operational Risk
This risk refers to possible dangers that may occur as the business operates. This is associated with routine tasks and procedures that allow an organization to offer its products or services. The type of operational risk a company must manage depends on the industry it belongs. But accounting and taxation are operational risks that any industry should be mindful of.
Every business owner must seek the advice of experts to minimize their operational risks. Attorneys, financial consultants, and business secretaries are examples of these experts who can help business owners as they deal with such risks.