Defining Financial Risk And Its Types

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Orlando runs a welding shop and is assessing the various risks that may affect his organisation. This includes looking at financial risk that may apply, 

What is financial risk? 

This is the risk that a business entity or individual will be unable to meet financial obligations. This may be due to a range of reasons. 

Types of financial risk: 

Market Risk this is uncertainty that arises as a result of changes in market prices. For Orlando’s company, fluctuations in the price of metals directly impact operations. Demand for his niche services is also a factor. 

Credit Risk this is when an external entity fails to keep a promise. This may then lead to financial uncertainty on the part of the firm. If one of Orlando’s clients constantly pays him late then this affect operations. 

Liquidity Risk this is when a company is unable to pay. If a company does not have enough cash flow then is likely that it won’t be able to meet certain obligations. Mitigation of such a risk involves creating an emergency fund. 

Reputational Riskif the perception of the entity is negative, this may have a bad effect on finances.  

Having clear risk management policies in place goes a long way towards mitigating financial risk. 

For entrepreneurs like Orlando, defining this risk and its types is vital to fully understanding what it means to operate as efficiently as possible. Part of this journey for him involves creating a way to manage this risk in such as a way that it becomes easier to operate without the fear that operations will be disrupted or halted.  

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