Understanding & Managing Financial Risk in Business: Currency, Liquidity & Interest Rate

Introduction

Risk in business is concerned with managing and understanding the threat that is faced by an organization in the attempt of achieving their objectives. The organizations face various types of risks such as environmental risk, law and regulation, and financial risk. The financial risk of an organization relates to business financial operations, in essence, loss of funds risk, which may take different forms such as currency risk, liquidity risk, and interest rate risk (Sadgrove, 2016). However, the risks vary from one organization to another. For instance, the use of the Altman model has widely been applied in companies to predict bankruptcy. The act of predicting a company's bankruptcy is considered as a necessary activity in avoiding the risk of driving the business out of the market (Reyna & Chick, 2014). Based on this model, several computation analytic sub-models lie under its functionality. This includes multiple discriminant analysis, analysis of logarithm, one-way variance analysis, current algorithm analysis, and analysis of neural networks, a bankruptcy prediction method that is considered to be more resent. Thus, the mitigation of this financial risk will involve the application of efficient mechanisms by the management that would ensure the menace is countered.

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Mechanisms for Mitigating Financial Risk in Business

Artificial Neural Networks (ANNs) in risk prediction is primarily used because they offer several benefits such as their ability to perform nonlinear statistical modeling which is used to provide new options to other methods of statistics as well as learning directly from the present examples without necessarily providing an analyzed problem solution. Several ways can be used to predict conditions that make financial risk more likely. For instance, if investors invest in a firm that has debt, there is a high probability that they will lose their money. In such cases, the creditors are paid before shareholders. Future financial problems of a company can also be detected in case of the low value of corporate prosperity.

Risk occurrence can be reduced by the use of prediction models that help in elimination probable financial risk. To eliminate the financial risk identified by the low value of corporate prosperity, the business partners have to consider their future cooperation with the company. However, the established financial risks of a business can be reduced through engagement in different productive mechanisms such as:

Developing a Solid Business Plan

Business managers should be aware of the amount of capital as well as time that should be needed in investing in business before even the start of an investment. Additionally, the management should invest in market research since they give ideas on whether the business has a chance to grow or collapse, leading to loss.

Performing of Quality Control Test

The business should implement a review of customer service on the product before extending the offering scale. The product should be tested so that they can be improved if there is a need to do so before being released in the market. This would help in establishing whether there is a need to invest in that product or opt to another alternative, thus reducing financial loss.

Reduction of Portfolio's Level of Risk through Wide Allocation

The first mechanism of business to lower its financial risk is the allocation of money among various investments. However, the portfolio on the investments allocation of a company will depend on the amount the management would like to shoulder. The act of spreading the investments within stocks as well as bonds protects the business against the risk of category performing poorly. Adaptation of using online calculator helps the organization whereby the tool provides an excellent framework that helps in understanding the formula of funds allocation though the management choices may likely vary. However, despite the risk associated with the financial risk in a business, early warning helps in evading the risks before invading the organization. Early warning signs of financial crisis in business are valuable since they help the individual concerned determine what to look at and helps the company to realize the repulsion method incase the crises tries to hit its operation. The early warning models helps in identifying the vulnerable states before they cause financial crises. The early warning models key objectives pertains the separation of vulnerable condition from the non-vulnerable condition in a business.

However, an early warning model is a sequence that consists of three sections, which are; pre modeling, modeling, and post modeling. These models depend on the previous issues that were communicated by its previous model in issuing a near warning of risk.

However, for a business to mitigate financial risks, various mechanisms need to be applied within the organization management structure. Generally, significant ways that need to be administered by an organization in mitigating financial risks in the business include:

Evaluation of Business Operation for Efficiency

The management should consider assessing the entire functionality of the business starting from the employees who are the key component of a business. The management should ensure the employees are satisfied and comfortable in the various places of work. This may be facilitated through exercising appreciation roles such as rewarding them and promoting them in their various roles as well as negating some duties to them.

Creation of a Strong Foundation for Business HR Practices

For any organization to manage its financial risk, it must have a strong and established Human Resource HR. The organization must consider strengthening its human resource management procedures and practices. This may be achieved through continuous training of the individuals under the HR department. Further, the organization leaders must be in good relationship with the human resource individuals and be sensitive to their various need. Also, the management should be ready to listen to human resource planning to avoid conflict of information that may lead to loss of funds.

The Business Should Use Metrics in Decision Making

For every decision that an organization needs to take for an investment, it is essential to weigh the expected outcome in comparison to their proposal. The qualitative output of an investment should be put as the first priority without looking at the quantity. These mechanisms mainly assist a business to come up with the final product that may have a long duration for lasting in the market. Through this, it can be assured that the business will not go at a loss despite the number of funds spent on that particular investment.

The Business Should Be Prepared for Loss Coverage

To mitigate the financial risks in business, the management should be prepared for unexpected. Once an organization as established an investment, it needs to establish a strong risk management plan that may be used to cater for any crises that may arise as a result of a loss. Organizations need to ensure that they obtain competent insurance cover for their investments to ensure their property, as well as that of the customers, are well secured from any risks.

The occurrence of financial risk in a business may be reported to different parties in an organization in order to notify them before they are court up by the menace and to avoid panic among the members in case of failure in the delivery of service. Depending on the position of an individual in the structure of the organization, the report will be delivered depending on your role in the organization management. However, some businesses remain reluctant in disclosing their financial risk report since they feel they might threaten their competitive advantage.

However, the risk associated with the business should be reported before it spreads over to a condition that is unstoppable. Comprehensive financial risk analysis should be done before reporting to the governing bodies. The risks reports are delivered according to the specific user role in the business. The report needs to be clear, balanced, and well understandable by everybody. Further, the report disclosure should be consistence and presenting relevant information regarding the risk.

Conclusion

Through mitigation of financial risk, organizations would secure and enhance their growth. This would be facilitated by the trust that would be built towards the business by the customers due to increased security of their investment. Early warning signals of financial risks such as performance issues, financial distress and cash shortage need to be taken seriously and rectification measures employed to curb financial risk. Thus the organization must ensure their operations are free from financial risks. Further, the organization should ensure positive relationship exists within the entire management of the business ridging from the top management to the bottom.

References

Sadgrove, K. (2016). The complete guide to business risk management. Routledge.

Reyna, V. F., Chick, C. F., (2014). Developmental reversals in risky decision making: Intelligence agents show larger decision biases than college students. Psychological science, 25(1), 76-84.