Every business, big or small, needs to be able to manage its financial risks.
In this article, we look at 4 types of financial risk that all businesses should consciously manage in the course of running their affairs.
Risk #1 – Liquidity Risks
This is the risk that a business will run out of cash. This can arise from a number of factors, including:
- Insufficient revenue – your business is not earning enough income.
- Bad debts – your customers are not paying you what they owe you, or are not paying you on time.
- Excessive expenditure – your fixed or running costs are too high.
- Inability to get funding – for example, your business is unable to borrow money.
Some businesses appear to think that they can get away with managing their liquidity risks by not paying their debts on time or even at all – leaving their vendors, suppliers and sundry other creditors high and dry.
Aside from the mistrust this breeds in their business relationships, this raises the risks of these creditors commencing actions which may eventually drive the business into insolvency.
Risk #2 – Currency Risk
Businesses can be exposed to foreign exchange risks.
For example, if an exporter sells in Malaysian Ringgit but has Singapore Dollars as its reporting currency, it may experience a drop in revenue if the Malaysian Ringgit falls against the Singapore Dollar.
Foreign exchange risk can also be an issue if a business’s inputs are substantially denominated in a foreign currency, or where its borrowings are primarily in a foreign currency.
Risk #3 – Interest Rate Risk
This can arise where a business has borrowed money to finance itself.
Borrowing at variable interest rates can be advantageous to a business if market interest rates fall, but disadvantageous if they rise.
Conversely, locking in fixed interest rates can be advantageous in a rising interest rate environment, but businesses can end up forgoing these advantages if interest rates fall.
Risk #4 – Operational Risk
This is not, strictly speaking a financial risk, but more a question of whether your business has sufficient internal controls to mitigate the risk of things like fraud and misappropriation of business monies. Have you considered for example:
- Who has the authority to sign off on payments in your business
- The maximum limit on this authority; and
- What oversight (if any) the business has over this authority?
In the next article in our series, we will talk about how implementing a proper treasury function in your company can mitigate the above financial risks.
Candoer Pte Ltd helps businesses with their marketing, productivity, compliance and cost savings strategies.
We also work closely with our partners at Wrike to implement collaboration solutions suitable for your needs.
For further enquiries, please email us at:
jiekai.candoer@gmail.com or weekiang.candoer@gmail.com
