Managing And Understanding Financial Risk

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The management of financial risk can be used to protect against financial market exposure. This is essentially protection against loss in value of a financial asset. 

For Violet, who owns her own make-up range company, managing and understanding financial risk should become a key part of making sure that her business operates as efficiently as possible. 

This includes the development of relevant policies and procedures.  

Avoiding unnecessary risk should also be part of the process. 

Many businesses often generate passive income by using financial investment. Violet could opt for this as a way of making additional money. Going into this also means that she will need to become acquainted with the risks and rewards involved. She has to learn how to make the protection of company resources a priority. Managing and understanding financial risk in this sense means that she will have to ensure that there is no loss of capital. By enlisting expert help and diversifying the company’s portfolio, there is a greater chance of avoiding loss of money. 

Violet also needs to understand that the use of a savings account ensures that there is cash on hand for emergency purposes. This may also provide a relatively safe investment tool. By establishing an emergency fund with at least three to six months’ worth of savings she will be in a better position financially, should business go south.  

Having the right amount of insurance is important. This should protect her from losses she can’t afford to replace. 

There are three typical ways of managing risk: 

  1. Sharing the responsibility 
  2. Doing nothing and accepting it 
  3. Hedging risk 

Violet needs to decide which will be the best way of managing risk for her business, in a way that will be most efficient for business operations.  

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