Financial Risk Management Techniques


Financial risk management involves analysis of risk and methods to mitigate risk that may lead to financial loss. It doesn't matter how large or small a company is, having someone or a team of individuals reviewing risk and implementing policies to lessen risk is essential.

Safety Risk

One priority is to assess safety risk. When employees get hurt, time at work is lost. Productivity will fall and costs associated with employee disability or compensation will rise. Smart companies understand this and look to mitigate risk far beyond the levels required by worker's compensation. This includes reviewing industrial work areas to ensure that employees working in highly mechanical areas are safe. But industrial or construction areas are not the only places to mitigate safety risk. Employers should look at employee work stations to ensure an ergonomic design lessening the risk and expense of injuries such as carpal tunnel syndrome or chronic back pain.

Credit Risk

Many companies use credit to pay for short-term supplies or to fund long-term growth. While most companies view loans and credit lines as a necessary part of business, those who understand how to mitigate credit risk are far more likely to succeed. This is because those lending money are looking at credit risk when issuing any type of loan or credit line. To mitigate credit risk a company wants to be sure it is not seeking more credit than it can feasibly repay in a timely fashion. A growing company may not want to grow in phases that allow it to recoup some of the debt spent. Companies can increase their credit rating, thus reduce their credit risk, by starting to establish credit long before they need it. This can be accomplished with vendor credits, small business credit cards and loans. Your average balance in your bank accounts also help establish a lower credit risk. After all, if you have had an account for a long time with money in it to cover debts and obligations, you are seen as credit-worthy.

Operation Risks

It is important to have a plan for when things go wrong. Operational risks can lead to catastrophic financial losses. Examples are employee errors, system failure or natural disasters. It also covers protecting yourself and your business from fraud. Having adequate insurance is not always enough; you may be covered for the loss of items in a flood, but are you covered for the days your business is not operating? Contingency plans assess what happens if you business is down for an hour, a day, a week or month (even longer).

Knowing how you will fulfill orders whether you subcontract things and make lesser profit but retain customers is an essential part of mitigating operational risk. Talk to your insurance agent about adding a rider that covers you for down time as well as liability insurance should an employee defraud your company or your customers. If you are at risk for a computer system going down, look into a backup server and have IT personnel familiar with your system prepared to get to work if needed. These may be subcontractors who are familiar with the system but not on payroll unless needed.

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