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What are the factors affecting financial risk?

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What are the factors affecting financial risk?

Operating a company comes with inherent risks. This is why it’s vital for business owners and managers to be adequately prepared for these risks and to find ways of dealing with them most effectively. 

Risk can either be internal or external. 

While there may be ways to predict some forms of risk, some just cannot be planned for. Companies need to be ready for a multitude of forces that can affect the ways in which a company’s finances are affected. 

Factors affecting financial risk vary and they all affect company finances in different ways. 

Market risk may be as a result of changes in technology or even consumer interest. A prime example of failure to be conscious of financial risk is the Blockbuster company’s failure to heed advice when DVDs gained rampant popularity.  The video company was at its peak when it was advised to buy Netflix, which is now at the forefront of video streaming services globally. If Blockbuster had taken care of its financial risk by becoming aware of technological threat to its business, it may have been able to survive. 

Changing regulations, such as increased taxes may possibly be one of the biggest factors affecting financial risk. If the government increases taxes for businesses, for instance, this has a direct influence on business finances. 

Liquidity is a factor affecting financial risk because if an organisation should have to access finances immediately, it ideally should be able to do so without any hassles. If management ties most finances up in assets that are hard to convert into cash, then this is a major risk. 

Financial risk can be regarded as direct risks that come about as a result of how the business handles money coming and going out of the business. Without prudent assessment of this risk, a company faces failure.

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