The Types and Strategies of Financial Risk Management

Making decisions in the business will not be difficult if you have planned proper management, including financial risk management. This is the job of a finance director to check and monitor every instrument. Thus, financial conditions are always related to the market.

As a business owner, the types of financial risk are not only one or two. Some risks can be unpredictable so you have to prepare the management for the predicted ones. There are several strategies that you can apply as well to keep the business on track.

The Types of  Financial Risk Management

1. Reputational Risk

Branding a reputation for the business always takes time. It relates to the value of gaining trust from the customers. However, reputational risk is also one of the financial risks that you have to pay attention to. Reputational damages create a shorter term for the business and hurt the whole organization.

Though it is unseen, reputation is part of an intangible asset. The trust of the customers is always important. So when the damages occur, you have to be ready to maintain the reputation of the business. Take some actions with good public relationships. The protests from customers are insights you should not ignore.

2. Operational Risk

The process in operation may have many risks that need good financial risk management. The cycle of production, systems, security, and legal always involves big financial expenses. It can be an error from internal people as well, so you have to make sure every part is capable.

For some companies, the risk in operation has a high tolerance. However, it does not mean that you could let it go because it can destroy the business. Managing the risk in operation should be based on the department. It is hard to eliminate all, but you can always be efficient.

3. Credit Risk

What is credit risk in financial risk? It is always about debt that a company takes from a financial institution. This is a high risk, so a company should be able to keep the level as low as possible. At least, the condition of borrowing money from institutions is still healthy.

One of the methods that you can apply to avoid this risk is checking the borrower. The high interest is dangerous for the financial condition of your business. This is a mitigation to avoid losing assets. See the clients when the company buys insurance from a third party.

4. Foreign Exchange Risk

The rate of foreign exchange is also important to manage. With financial risk management, you can adapt to the loss when USD and other forex are stronger than your currency. The financial transaction occurs almost every day and the change may be unfavorable for the company.

Review your market value from time to time. The degree can affect the position of your business, especially if your business relies on export and import which can be affected because of forex fluctuations.

The Strategies to Face Financial Risks

1. Risk transfer

This is the strategy to remove the risks and give them to the third party. It is manageable as long as you do not cross the line of harming the related party. Before transferring, you should know the next potential risks that may happen after that. The same strategy might not work.

2. Risk avoidance

This is the core of financial risk management where the people and parties involved will avoid certain risks. There may be many activities that can harm the business. Instead of running the activities, it had better avoid them all. It can be individual and group activities.

3. Risk retention

This is the strategy that the businesses do the most. Instead of avoiding or transferring, they are accepting the risks and doing their best to solve all the risks until they can be steady again. The process will depend on the plan they have set before.

4. Risk deduction

Reducing risk is also part of risk management where they will mitigate the loss by avoiding potential loss as well. This is common in many companies because they cannot lose more than they already have.

Choosing tools is also one of the methods to avoid loss in your business. An SMS broadcaster device is one of financial risk management because it improves marketing where you can broadcast messages to the customers. It has low risk because its durability is high compared to other tools to engage with the customers you have previously.