Financial Risk is one of the major concerns of every business across fields and geographies. Risk can be referred as the chances of having an unexpected or negative outcome. Any action or activity that leads to loss of any type can be termed as risk. There are different types of risks that a firm might face and needs to overcome. A fast-changing global environment demands organizations have both financial stability and liquidity.
Before understanding the techniques to control risk and perform risk management, it is very important to realize what risk is and what the types of risks are.
Widely, risks can be classified into three types: Business Risk, Non-Business Risk and Financial Risk.
- Business Risk: These types of risks are taken by business enterprises themselves in order to maximize shareholder value and profits. As for example: Companies undertake high cost risks in marketing to launch new product in or-der to gain higher sales.
- Non- Business Risk: These types of risks are not under the control of firms. Risks that arise out of political and economic imbalances can be termed as non-business risk.
- Financial Risk: Financial Risk as the term suggests is the risk that involves financial loss to firms. Financial risk generally arises due to instability and losses in the financial market caused by movements in stock prices, currencies, interest rates and more.
Financial risk is the possibility that shareholders or other financial stakeholders will lose money when they invest in a company that has debt if the company’s cash flow proves inadequate to meet its financial obligations. When a company uses debt financing, its creditors are repaid before shareholders if the company becomes insolvent. Financial risk also refers to the possibility of a corporation or government defaulting on its bonds, which would cause those bondholders to lose money.
When you are a consultant in Financial Risk, your days consist of analyzing, predicting and mitigating financial risks and advising all possible stakeholders.