Lesson number one in Financial Risk Management: you have to take risks to win. This seems to be an intangible rule for any entrepreneur. But running a business isn't like playing at a casino! Even if risk is part of the entrepreneur's DNA, he or she must still be able to manage financial risk. Otherwise, the financial viability of the business could be jeopardized. In this article, we'd like to draw up a list of the major risks facing a company, and give you some tips on how to limit them.

Financial risk management: what are we talking about?

Financial risk management covers a wide range of possibilities, depending on the company's activity and its financial operations. Generally speaking, a financial risk refers to the risk of losing money as a result of a financial transaction: purchase or resale of financial assets, but also sale of products or services with a financial impact. The nature of risks evolves over time through the emergence of new technologies, such as blockchain, and must be monitored by risk managers.

Financial risk management takes many forms:

  • Interest rate risk. This is the risk incurred by companies that invest or borrow at variable rates. It is generally assumed by financial institutions. In the first case, a change in interest rates affects the portfolio of assets held by the financial institution, resulting in a gain or loss in the value of its assets. This is referred to as a capital loss risk. In the case of a company that borrows at a variable rate, an increase in the rate will automatically increase the amount of the loan repayments. This risk is commonly called loan-to-value risk.
  • Foreign exchange risk affects companies that carry out operations in a currency other than their own. The fluctuation in the value of currencies between them on the foreign exchange market means that a company's receivable may lose value and thus negatively affect its revenues. On the other hand, a debt denominated in a foreign currency may increase in value due to the appreciation of the currency against the domestic currency.
  • Counterparty risk is the risk associated with the non-fulfilment of a contract. It takes as many forms as there are contracts. For example, a company may not be paid on time or at all; a bank may not receive payment from a borrower, etc.
  • Liquidity risk mainly concerns financial institutions, since it concerns the ability to buy or sell an asset more or less easily. This asset is not necessarily financial. It may concern goods whose resale or purchase is linked to the credibility of the seller or the buyer, or even to the nature of the goods themselves if the market is too small to sell a given stock. To say that a market is illiquid means that few buyers or sellers are active, which increases the risk of not being able to find a buyer or seller at the right time.
  • Risks related to the company's environment. They are diverse and can be linked to the weather, the country (risk of conflict or linked to the absence of structures, etc.), the potential bankruptcy of an establishment (risk of default), and internal operational risks within the company (failure to respect procedures, breakdowns, etc.).

How to limit the financial risks within your company?

The implementation of a financial risk management policy in a company is a sought-after professional skill. Since the risks to be covered are closely linked to the nature of the company's activity, business skills take precedence over pure technical skills. Risk management is one of the key success factors of many companies and today goes beyond the sole framework of financial institutions with the creation of dedicated departments.

Blue Soft supports its clients in the key industries of financial risk management: financial institutions and insurance companies of course, but also the energy and telecom industries that provide vital services to the population, transporters, retail and e-commerce, as well as various industries for which risk coverage is paramount.

Four major areas of intervention are covered by Blue Soft : business continuity, internal control, data centers and information systems security. The challenge for client companies is to be able to adapt quickly in the event of the realization of risks, but also to anticipate them and to be able to assign the right resources at the right time.

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