How to Mitigate Financial Risk in Your Business

Are you paying attention to your money – the ins and outs, the benefits, the risks? When you run a business, you have the potential for both profit and loss. Every decision you make and situation you face affects how your business performs, and, in turn, profits. But, how do you mitigate this financial risk in your business? You can’t avoid making decisions forever.

What is a Financial Risk in Business?

A financial risk is a potential future situation or event that can cause your business to lose money. When a risky situation appears, it can affect your cash flow and other financial obligations.

Businesses in debt are more likely to experience and deal with financial risk. Still, financial risk is something that is nearly impossible for a business to avoid. Rather than prevention, when dealing with financial risk it’s essential to have a system or plan in place to mitigate the damages.

What Are The Types of Financial Risk Your Business Can Experience?

While there is no main “type” of financial risk as any risk that can affect your cash flow is considered a financial risk, the most common types can be sorted into five categories:

1. Growth Risk: When you have to pay for the resources in an increased sales period before all payments are received. This can cause delayed payments for other obligations.
2. Leverage Risk: Your level of business debt or borrowings. Can become a risk during periods of decline or reduced sales.
3. Liquidity Risk: This relies on your cash flow management and if you will have enough cash to cover your payments and debts as they are due.
4. Credit Risk: You have two ways you can have credit risk. When you risk not being able to make your payments on debt and when you have goods and services that are delivered on credit to your customer. 
5. Competition Risk: When a competitor becomes a risk to your business due to actions that may have a negative impact on your cash flow. This applies to both existing and new competitors.

Each financial risk can be mitigated and some can even be avoided by making informed business and financial decisions from the beginning. Others will have to be navigated as they happen – for example, the competition risk is unpredictable to a certain extent and will require your business to be adaptable to successfully mitigate it.

How Do You Mitigate Financial Risk in Your Business?

The main way to mitigate financial risk in your business is to maintain a transparent view of your finances and business operations. Additionally, making informed, educated decisions when there is a possibility of financial risk is key. 

Ensure that you have the proper in-depth reports and metrics to get a “full picture” of the situation before making any decisions. Prepare ahead of time by understanding the types of financial risks that you can’t prevent and that you’re most at risk for. 

When in doubt, consult with a professional in the field. Speak with an accountant or financial advisor to make an informed decision and to create a recovery plan in case something does go wrong. 

Finally, stay ahead of your financial risks by maintaining a clear system for your finances and bookkeeping. Not sure if your business is prepared for unexpected financial risk? Connect with ModVentures today.