What is Financial Risk Management?

Financial Risk Management

Financial risk management is at the foundation of effective financial planning for most companies particularly small companies. Small companies simply must have a better understanding of financial risk management to navigate present market volatility and prepare for the inevitable post-pandemic economic future. At some point, every company or organization regardless of its size must deal with financial risks and that point is sometime in the distant future, on an annual or semi-annual basis. To plan for financial risks is therefore crucial to any company planning growth and/or future achievement.

Financial Risk Management

Assistance to Businesses

Today, there are many companies specializing in providing advice and assistance to businesses on how best to manage financial risks. Accounting firms are only one of the numerous services offering such services. In addition to accounting firms, there are also Insurance companies, Real Estate brokers, and Public Accounting firms offering similar financial risk management services. The most important objective of these companies is to provide advice to their clients in order to maximize their revenues, maximizing profitability while minimizing their potential losses.

Good Accounting Firms 

Most importantly, such services can help businesses increase shareholder value. Good accounting firms should be able to help businesses improve their cash flows and improve cash management. They should help businesses strengthen their balance sheet. The financial advisor should also be able to help businesses reduce their reliance on short-term funding sources (i.e. short-term financing).

Financial Risk Management

Full-Time Risk Manager

In the UK, professional financial advisory firms play a key role in helping companies enhance their ability to manage financial risks. In fact, virtually all large UK corporations employ at least one full-time risk manager. These risk managers are typically located in the front office of the company. Other companies employ a “third party” or “front office” or a mixed entity combination of internal and external personnel to oversee risk management activities. In all cases, the most qualified risk managers will spend significant time on the front office job – reviewing balance sheets, developing and implementing policies to mitigate financial risks, overseeing significant transactions involving client assets, assisting with client negotiations with lenders on a variety of products and/or services, reviewing investment and exit strategy, among other responsibilities.

Advisory Services to Businesses

A number of professional organizations have arisen over the years that specialize in providing advisory services to businesses and professional entities dealing with a wide range of different risk management issues. Some of these advisory services include international finance and advisory services to UK companies and corporations. The International Association of Professional Debt Advisors (IAPDA), the International Association of Professional Liability Advisors (IAPL), and the Financial Planning Association are just some of the many professional organizations that provide a variety of different advisory services. Of course, some of the more well-known and respected professional debt management advisory services providers include, but are not limited to, Covington & Burling, Inc., Independent Financial Advisors, Inc., and Independent Financial Solutions, Inc.

Enterprise Risk Management Software

An important aspect of IFA is the implementation of enterprise risk management software. Enterprise risk management software allows businesses to effectively manage risks to the organization, its products, and/or services and to ensure that a business remains proactive and prepared for any financial problems or risks that may arise. The use of enterprise risk management software also allows businesses to monitor their actual cash flows and capital expenditures as well as the long-term performance of their balance sheet. Additionally, it allows businesses to provide accurate cash flow forecasts as well as take other necessary steps to improve cash flow conditions and/or liquidity. By monitoring cash flow conditions, businesses can also ensure that they are meeting their obligations to their customers in a timely fashion.

For Small Business

The Small Business Administration’s Office of Technology Offices provides training and support for small businesses on a variety of topics related to IFA and Covid-19. One such topic includes how to implement IFA and Covid-19 solutions within an organization. The program also provides training and guidance on how to deploy IFA and Covid-19 solutions within the company’s various operational systems and reporting functions. The Office of Technology Offices also publishes a number of technical publications that address various topics related to managing financial risk.

IT Systems and Networks to Improve Financial Performance

Other topics that the Small Business Administration’s Office of Technology Offices counsels include improving IT systems and networks to improve financial performance. Counselling also involves advising businesses on the creation of risk management plans and policies and the creation of reporting systems that comply with federal reporting standards. Finally, counsel is given to assist SMEs on how to deal with financial debt issues such as repaying credit card debt and managing accounts receivable. As a result, many SMEs will use third-party processors to process credit card payments, which eliminates the risk of credit card interest rates increasing and creating financial volatility for SMEs.

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