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What are the different types of financial risks?

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What are the different types of financial risks?

For any business operating anywhere in the world, there are a range of risks involved. They may threaten various aspects of the company and may not always be prevented, but may be prepared for.  

Take for example the company CEO who makes sexist remarks via social media. This will affect the business’ reputation somehow and consumers will expect some kind of consequences. For the company, this presents a number of risks. It’s important for the company to have a plan for how to deal with such an event. If not properly dealt with, the effects could ultimately lead to greater financial risks.  

Credit Risk 

This is when people borrow money and are not able to pay for what they have borrowed. This affects businesses by way of decreased income. One of the more common types of financial risk, with less money coming into the company, there is no way to afford to pay for expenses, which could lead to the financial downfall of a company. 

Liquidity Risk 

This means that a company owns assets that cannot be sold quickly enough to cut losses in a volatile market. It effectively amounts to an inability to execute transactions. Should a company need to have access to liquid assets, it may mean that it has to sell quite quickly. But if investments are tied up in other assets, then this may not be possible. 

Operational Risk 

This may be as a result of technical failures or mismanagement within a company. If a company mismanages funds, then this inevitably has an effect on its financial future. 

Market Risk 

These are changes caused by market influences.  

Other types of financial risk include funding risk, political risk and reputational risk. These risks tend to be interdependent, making the company more vulnerable. 

 

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