Any organisation has inherent risk involved in operating it. It’s for this reason that it’s so vital to have good risk management in place.
There may be a number of factors that have an effect on the operational efficiency of a business entity. Without addressing the risks involved, there is potential that the business many be hampered as a result.
Financial risks can be categorised into:
Changes conditions in the marketplace may have major effects on returns. For traditional forms of selling, such as physical stores, the advent of online shopping has had both positive and negative consequences. For a small fashion boutique that has just started, market risk includes methods of purchase and competition. For instance, if there are suddenly a lot more competitors in the market due to ease of access online, then this poses a market risk, which causes financial risk for a company.
This is incurred by extending credit to customers. There may be a chance that they won’t pay on time, which affects the company’s own obligations. This is one of the major categories of financial risk for a company mainly because without access to credit, an organisation may have a harder time with obtaining stock or operating in more efficient ways.
There are various risks that come about from ordinary business activities. If the company is facing a lawsuit or if it’s affected by fraudulent activity, then this affects operations directly. This is a major financial risk for a company because if operations are halted, then cash flow is directly affected.
This is a question of how easy it would be for a company to convert its assets into cash. It’s also a question of how much daily cash flow there is. If a company is unable to maintain consistent cash flow, chances are that this is a major financial risk.