Business and Financial Risk
There are many business and financial risks that are dealt with by companies each and every day. Among these are risks dealing with interest rates, foreign exchanges, credit, operations, and commodities. Organizations have to learn how to measure these risks, and they need to take global initiatives that they can use in financial risk management in order to ensure that they are as successful as possible. Protecting themselves financially takes work, but it has to be done if the company is to remain viable in the marketplace. In order to understand how to identify and address the major risks, a company needs skills and knowledge. Or, more appropriately, it needs people with skills and knowledge. The right people can make all the difference in an organization (Flyvbjerg, et al., 2003; Markowitz, 1952). Finding those who are trained to identify and understand risks allows the company to build a good team that will work together to handle any issues that arise with the business.
The interest rate risk is a part of doing business. Interest rates fluctuate, and how much interest a company is paying on its debt can make a big difference in the payments that company has. Conversely, how much interest the company is earning on its investments can also significantly affect the bottom line (Horcher, 2005). That is both good and bad, because a company has to ensure that it is paying out as little as possible and bringing in as much as possible so that its bottom line can be the best that can be seen. Companies that are not able to do that often struggle. Interest rate risk has to be expected, but the goal is to mitigate the risk as much as possible. By on debts when the rates are low, and getting fixed rates on assets when the rates are high, a company can provide itself with a better structure and a better way to move forward toward financial success (McNeil, et al., 2005).
Foreign exchange also produces a risk to companies. When a company trades with other companies in its local area there is not much risk. The currency and local regulations are the same for both companies. However, when companies start trading with other companies in other countries, there are more issues to be faced. The regulations that are seen from one country to the next can be quite different, and when a company fails to adequately address that the company can end up owing more money than expected in tariffs, taxes, and fines (Flyvbjerg, et al., 2003). That can cause the company to lose out instead of making the money it had hoped to see. The exchange rate of currency from one country to the next must also be taken into account so that a company makes sound decisions regarding the risk of foreign exchange.
Buying on credit is something most companies do, just like most people do. There is nothing inherently wrong with using credit, but it has to be used wisely. The company must clearly understand the terms of the credit, including the interest rate, the monthly payment, the number of payments, and the options it has should it not be able to repay the credit as originally agreed (McNeil, et al., 2005). If the company simply signs on the dotted line and does not to the terms, the company can end up financially damaged and unable to move forward. It could even cause the company to have to declare bankruptcy, and the company would end up shut down and non-existent. The officers of that company could also see financial fallout from poor credit decisions so using credit is not something that any business should take lightly or go into without knowing all the facts (Horcher, 2005).
For any company, the commodities that it has and uses matter. If it cannot get something it needs, it cannot continue to produce the goods that it will sell to other people. That is unfortunate, because an otherwise good company could end up in ruin because it cannot provide for its workers and its customers. The cost of commodities matters, and companies that understand the value of what they are selling and what they need to purchase in order to make those sales are more successful than companies that “wing it” and simply hope they can get through what they are doing until the next time they need to purchase more commodities (Flyvbjerg, et al., 2003; Horcher, 2005). Understanding the price of commodities and the value of the same is vital for any business (Horcher, 2005). It is also important to work with suppliers of those commodities to ensure that the best quality for the lowest price is being purchased.
All companies have operational risks they must face. Some of these are easily understood and planned for, and others are more complicated. Some are completely unforeseen, such as acts of nature that cannot be controlled for or planned in advance. The more prepared a company is, however, and the more it has planned for, the better off it will be when something unexpected appears (Flyvbjerg, et al., 2003). It is not possible to plan for every bit of operational risk, though, so companies have to be ready to adjust to changes that can occur in the business world. Things can change very rapidly sometimes, and a company that is prepared and that has other ways to handle operational risk can generally see a higher level of success.
Organizations measure risk in different ways, depending on what kind of organization it is and how large of a business is being run (McNeil, et al., 2005). When a small business measures risk it is generally more localized, but when a large company measures risk it has to look at global initiatives. However, there are some global initiatives that exist in financial risk management. One of the largest is an effort to consolidate the rules for company financial information across the world. In other words, it would require all companies to disclose specific financial information in their annual reports, and that information would have to be calculated a particular way (Flyvbjerg, et al., 2003). Without doing that, an investor or other company may not have a good understanding of what a company can offer.
Flyvbjerg, B., Bruzelius, N. & Rothengatter, W. (2003). Megaprojects and Risk: An Anatomy of Ambition. NY: .
Horcher, K.A. (2005). Essentials of financial risk management. NY: John Wiley and Sons.
Markowitz, H.M. (1952). Portfolio Selection. The Journal of Finance 7(1): 77 — 91.
McNeil, A.J., Frey, R., & Embrechts, P. (2005). : concepts, techniques and tools. NY: .