Financial risk management: 5 tips to avoid damage to the financial health of your business

 


Do you think your company is at risk of not being able to pay its obligations in the coming months? In other words: how is your company's financial risk management?

This is an extremely important aspect for the success of any business . However, it is often neglected by some companies, either due to inattention or lack of knowledge on the part of managers.

In this article, we separate 5 essential tips on how to efficiently manage financial risk in your business.

Continue reading and check out a series of best practices that will help you take better care of your company's money.

5 tips on how to manage financial risk

Keeping an eye on the financial indicators of your business is important, so we have brought you a list of the most important ones:

But knowing and monitoring these KPI s is not enough! You need to manage your company's financial risk.

Check out how to do it!

1 – Create a list of risks that surround your business finances

In this first financial risk management tip, you need to put on paper the main risks that could harm your company's finances.

This practice is very important, as it ends up being a way to anticipate threats. However, it is worth remembering that the excess of risks listed may not be so beneficial.

That's because you're unlikely to give the necessary attention to all the risks present in that very long list. Therefore, disregard from your list, for example, those risks with a low probability of materializing. Keep the focus on those more everyday risks, which circulate the day-to-day of the company.

2 – Don’t overlook the unprecedented risks

A very common mistake during financial risk management is to disregard risks that are considered to be unprecedented in the organization's history.

Paying attention only to the company's history of events leaves it less prepared to face what is not recorded.

Events that have already happened are not necessarily related to future events.

3 – Make a diagnosis of the selected risks

Once you've selected the main risks that most deserve your attention, it's time to diagnose them.

In this tip, try to identify the type of financial risk (credit, liquidity, market or operational). Also try to relate them to the context in which your company operates and the peculiarities of the business.

Talk to employees and managers from different departments in order to better understand how processes are performed. This makes it easier to analyze the levels of probability and impact of financial risks.

4 – Establish an action plan

To prevent risks from materializing and bringing negative consequences to your business, it is essential that you create an action plan to reduce the chances of occurrence as much as possible.

Let's assume that one of the financial risks identified is paying fines for incorrectly issuing invoices. In this case, a strategy to prevent this from happening might be to automate the issuance of invoices .

Prioritize the risks most likely to happen. But be sure to also consider the impact of such risks.

5 – Put the action plan into practice and monitor the risks

In this last tip on how to manage financial risk, you must execute the action plan and constantly monitor risks.

The intent of monitoring is to ensure that the risk is under control, with minimal chances of occurrence. Financial performance indicators, such as cash flow, billing and profit margin, are great tools to fulfill this purpose.

The Income Statement for the Year is also an interesting tool. This is because the DRE data allows identifying the company's profits and losses and taking corrective actions.

Be sure to review your action plan frequently. This way, you can make the necessary adjustments to better manage your business's financial risks.

What do you think of our financial risk management tips?

Always keep in mind that this type of management should be seen as a dynamic and continuous process. Therefore, efforts to prevent risks from materializing must be constant and based on team spirit.

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