Types Of Financial Risk In Business

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Risk is a major concern for every organisation. This is essentially the chances of having an unexpected or negative outcome. For any entrepreneur, avoiding or managing financial risk is prioritised. After all, the identified risks may either taint or damage business operations, which may ultimately lead to the end of the business.  

Risk is any activity that leads to loss. 

No owner wants to lose financial security or business, so risk management is an essential part of the model of running the company. 

Financial risk in business involves financial loss to business entities. It’s the risk that an organisation may be unable to meet the debt obligations it may have due to insufficient cash flow. 

High priority risk types are usually classified into main categories, namely: 

Market Risk 

This type of risk is caused by movement in the prices of financial instruments. This may also be as a result of changing market conditions.  

Credit Risk 

This is when one fails to fulfil obligations towards credit providers. If a company provides credit to its customers and they fail to fulfil their debt obligations, then this has an adverse effect on the business’ ability to pay its creditors. 

Liquidity Risk 

This may be an inability to execute transactions. Insufficient cash flow leads to further financial risk. 

Operational Risk 

This arises out of operational failures. If a business is dealing with fraud, for instance, this affects operations, which has a direct influence on finances. 

Legal Risk 

This is when a company faces financial loss as a result of legal proceedings. Having risk management policies in place helps to mitigate this risk. 

Financial risk in business is also the possibility that shareholders will lose money when they invest in a company. 

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