How to manage financial risk: expert advice
Over 40% of Canadians face financial hardship, and it’s not just the pandemic. It is also because they are exposed to many risks which significantly affect their financial stability. In this article, Kevin N. Cochran, an expert in adult lifestyle management, has compiled various financial risks you need to watch out for and how you can manage them.
What are the financial risks?
A financial risk is any possibility of losing money for expenses. This greatly affects your cash flow and hinders the fulfillment of financial obligations. These risks come in many shapes and sizes and can affect anyone. Generally, you may encounter two main categories of risk: one that threatens your business and one that affects your personal life.
Financial risks in companies
Here are some reasons why a business may be prone to these risks:
- Too much debt
- Abrupt or adverse changes in exchange and interest rates
- Poor decision making
- Changing market environment
- Extremely vulnerable investments or transactions
You and your business can become the target of four major financial risks:
1. Market risk
Economic uncertainties, such as sudden changes in the prices of liabilities and assets, expose companies to market risks. Moreover, this type of risk can also be due to the constantly changing market environment. For example, nowadays customers tend to shop online rather than shopping in traditional and physical retail outlets.
2. Liquidity risk
This is directly related to the danger that a business will be unable to meet its financial obligations. This risk involves the inability to immediately convert certain assets to cash when suddenly needed. A liquidity risk can arise when the number of buyers is insufficient.
3. Credit risk
This is a risk caused by giving credit or money to customers and they do not pay, or when the company has credited suppliers and has not been able to meet its share of the OK. These activities can disrupt your business’ cash flow, reduce funds, and affect potential profits.
4. Operational risk
It is a risk due to operational failures of a company in ordinary business activities. It can be due to a bad plan and application, fraud, mismanagement and technical issues. A bad model plan means that the marketing and business growth plans are inaccurate and inadequate.
Personal financial risks
Every Canadian is also subject to personal risk. To properly manage your financial plans and management, you need to know the risks that prevent you from meeting your obligations. Below are four main types of personal financial risks you should be aware of:
1. Expense risk
This is incurred for various reasons:
- A lack of income to meet your needs
- Spend more than you earn
- Emergencies that require you to spend
In Canada, one of the common factors is gambling; playing in a casino is a risk. Countless games, especially online slots, can be addictive. Even if you play games at the best online casino in Canada, the likelihood of you losing more money than you expect is higher than that of winning at the casinos.
For this reason, the Canadian Center on Addiction and Substance Abuse (CCSA) had to provide guidelines to manage this risk and moderate gambling.
2. Credit risk
This is a risk involved in situations where you borrow money. You may incur a personal credit risk:
- Bad credit
- Bad and high debts
- Spending too much on debt-related expenses such as interest rates, additional fees, etc.
3. Income risk
It highly depends on your ability to earn income. So, if you are not able, it could be due to reasons like:
- Sudden job loss
- Living on income from volatile assets
- A disability that makes it impossible to get a job
4. Asset risk
This is dramatically triggered by any problem with your assets, including your investments. You are subject to the risks associated with the assets when there is:
- Damage to your property (property, etc.)
- Bad returns on investments
- A terrible investment portfolio
- Poor investment management
Advice on financial risk management
According to the Financial Consumer Agency of Canada, the stress of these financial risks and challenges has a significant impact on the health of many Canadians. That’s why to avoid serious health impacts, here are some tips on how to manage risks based on experts:
- Learn about the risks and how you may possibly be exposed to them.
- List all of your business and weaknesses in your financial capacity.
- Save enough money that you can use in the long run.
- When you are tempted to take financial risks, always look at the worst case scenarios.
- Separate your personal funds from your business funds.
- Don’t invest on impulse.
You can be exposed to many financial risks, and the best way to manage and possibly avoid them is to know how to manage them appropriately.