8 Tips for Companies to Manage and Reduce Financial Risks

Risk management

No business doesn’t want to cut down its financial cost without losing its efficiency and efficacy. Lower costs reduce prices of products in the market, boost demand, increase sales, and raise a company’s profits. It also aids higher employment via industrialization and improves standards of living. 

However, none of these would be achievable without good financial risk management. Risk management is one of the essential tools for all businesses for various reasons. For instance, companies that manage risk find it easier to coordinate and control necessary business data. Financial risk management also provides companies with better opportunities for performance management and protects a firm’s financial status. 

Today, economies worldwide have been suffering massively. Therefore, it’s best if all businesses assess their risks correctly and prepare for the worst. Without proper risk management planning, any surprise can take an organization downhill in a matter of days. Here are a few common ways to mitigate your company’s financial risk.

1. Plan 

Planning must always be your foremost step for any business decision. Creating a business plan will assist you in figuring out how much time and money you are willing to invest. Additionally, a business plan enables you to keep track of things properly and lets you allocate your resources more strategically. Good business planning also plays a pivotal role in managing cash flows and developing accountability. And most importantly, once you carry out market research, you get a fair idea of whether your business idea will succeed in the market or not. 

While planning, it will be a good idea to hire a professional for additional help. A qualified and skilled business planning expert, preferably someone with an accounting master’s degree, can significantly ease your planning process. They can also help you identify gaps and potential risks in your business plan earlier to avoid facing difficulties later.

2. Purchase insurance

Insurance is hands down the best way to limit losses. However, you must understand that insurance’s purpose is to cover only those losses you can’t afford. Hence, choose a proper insurance plan and avoid paying higher premiums for lower deductibles. 

You can opt for life insurance, disability insurance, professional insurance, completed operations insurance, or others. It is best to do your due research and pick the one that suits your company’s needs the most. 

Apart from managing and reducing a firm’s financial risks, insurance protects the business image and promotes business continuity. It also provides coverage for lawsuits and settlements, advertising liability, and keeps your business up and running. 

3. Quality control tests

Performing beta tests with a limited audience before launching a product into the market is an excellent step for all new and established businesses. Quality control tests help gain reviews beforehand and predict the extent of success of your product/service once launched. It enables you to prepare, improve, and considerably increase your success chances. Remember, customer service is everything to a business. It directly impacts your company’s reputation. 

Quality control tests ensure quality assurance and enhance production competency, cost efficiency, and customer trust. Quality control also encourages business growth and creates better work environments. 

4. Limit liability 

Limitation of liability is a favorite textbook technique of reducing financial risk. Experts say that by limiting one’s liability, they are allowing for more accurate budgeting and forecasting.

If you are a sole proprietor, consider switching to a limited liability company or a corporation. Under the latter, you no longer remain personally liable to pay off a company’s debt or other liabilities. An LLC also has a pass-through taxation policy, no restriction on numbers of members, higher flexibility, less paperwork, and a more organized company structure. 

5. Lower loans

Although most businesses commence operations through loans and grants, it’d help if you start with a loan as low as possible. However, it must still be sufficient to provide your startup with enough capital and growth prospects. 

The amount you need to borrow will depend on the type of your business and your current financial situation. But you have to consider the amount because business loans come with many unfavorable restrictions and regulations. These include strict payment schedules, high-interest rates, processing fees, and tedious application processes. Some loans also require significant collateral as security. 

6. Create a cash management strategy 

Cash is highly imperative to any business. Running out of money means the permanent destruction of a business. Therefore, establishing a solid cash management strategy is essential.

Efficient cash management can not only considerably reduce risk but can also streamline processes and eliminate downtime. It gives faster access to cash and resourceful business data, allows for tailored solutions, and detects cash embezzlements. Cash flow management also fastens the workflow capital cycle, organizes your spending, and gives you higher control over your company’s cash. 

7. Diversify your investments

Diversifying your investments limits the risk of an individual stock, reduces volatility, and limits chances of sudden market turndowns. With diversified investments, your portfolio can also outperform individual stocks, expose you to more opportunities for higher returns, and safeguard you against negative market cycles. 

Varying investments also help achieve long-term investment plans, keep your capital safe, and help avail benefits on compounding interests. You can diversify your investments by:

  • Spreading wealth
  • Keep building on your portfolio
  • Making use of index and bond funds
  • Rebalancing your portfolio periodically

8. Improve your accounts receivable 

Ensure to keep track of your invoices and whether your customers are paying bills or not. Maintaining accounts receivable is crucial for mitigating financial risks. 

You can consider creating an A/R aging report, calculating your ART, and diversifying your client base. You must also be proactive in your invoicing and collection efforts. If possible, offer an early payment discount and a payment plan. 

Furthermore, establish a clear and concise credit access process, maintain accurate customer data, prioritize credit management, and shorten payment terms.

Wrapping up 

Risks are reasonable but only to a certain extent. Too much risk can trigger uncertainty in a business and disrupt operations. Managing and controlling financial risks will help managers and executives make more informed decisions and act in favor of customers and employees.

Without sufficient knowledge about risk, business professionals will be unable to deal with potential problems. Therefore, ignoring risk is highly threatening. It might create several hostile obstacles for businesses if not attended to immediately. 

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.