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How can you use financial risk management techniques to protect your company from unexpected events?

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Financial risk management is the process of identifying, assessing, and mitigating the potential losses that may arise from various sources of uncertainty, such as market fluctuations, credit defaults, operational failures, or natural disasters. By applying financial risk management techniques, you can protect your company from unexpected events that could jeopardize your cash flow, profitability, or reputation. In this article, we will discuss some of the most common and effective financial risk management techniques that you can use to safeguard your company's financial health.

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1 Identify your risk exposure

The first step in financial risk management is to identify your risk exposure, which is the degree to which your company is vulnerable to adverse outcomes from various sources of uncertainty. You can use various tools and methods to identify your risk exposure, such as risk matrices, risk registers, SWOT analysis, scenario analysis, or sensitivity analysis. By identifying your risk exposure, you can prioritize the most significant and likely risks that could affect your company's performance and objectives.

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Shanique Elaine Harvey

ISO 31000 Certified Risk Manager
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Identifying risk exposure is indeed an important step when managing financial risks. However, companies should be very in tune and aware of their external environs as this may be an area that is often neglected but can end up being the most impactful to the performance of the company. A PESTLE/PESTEL may also be utilized to ensure that risk exposure to the company is properly accounted for to ensure that risks are not identified within a vacuum.

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Saalim Sabir Aurko

| Finance Professional | 8+ Years Experience in Treasury ($2B+ Fund Management), Project Financing ($1B+ Financial Close), Risk Management and Building sustainable financial strategies |
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To manage the financial risks, a company needs firstly to find the exposures and weigh in the risks associated with all these exposures. One also needs to look into the risk long-term and short-term exposures and make a risk matrix. There are various tools to identify risk and measure them. The risk appetite also varies from company to company which also needs to be taken into account while using these measurements.

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2 Assess your risk tolerance

The second step in financial risk management is to assess your risk tolerance, which is the level of risk that your company is willing and able to bear in pursuit of its goals. Your risk tolerance depends on various factors, such as your company's size, industry, culture, strategy, financial position, and stakeholder expectations. You can use various tools and methods to assess your risk tolerance, such as risk appetite statements, risk indicators, risk ratings, or risk maps. By assessing your risk tolerance, you can determine the optimal balance between risk and reward for your company.

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Shanique Elaine Harvey

ISO 31000 Certified Risk Manager
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When assessing risk tolerance, the company should also implement strategies and sanctions to ensure that the risk tolerance level of the company is adhered to at all times. What tends to happen in financial institutions are that risk tolerance levels have been established but are not adhered to. Especially if the lack of obedience to the tolerance levels reaps a great reward. So active monitoring of these risk tolerance levels should be instilled to ensure that the company strikes the ultimate balance between risk and reward.

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3 Select your risk mitigation strategies

The third step in financial risk management is to select your risk mitigation strategies, which are the actions that you take to reduce the impact or likelihood of the risks that you have identified and assessed. You can use various strategies to mitigate your risks, such as risk avoidance, risk reduction, risk transfer, or risk retention. For example, you can avoid risk by exiting a risky market or project, reduce risk by implementing controls or safeguards, transfer risk by outsourcing or insuring, or retain risk by accepting or self-insuring. By selecting your risk mitigation strategies, you can allocate your resources and efforts to the most effective and efficient ways of managing your risks.

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4 Implement your risk mitigation plan

The fourth step in financial risk management is to implement your risk mitigation plan, which is the document that outlines the specific actions, responsibilities, timelines, and resources that you need to execute your risk mitigation strategies. You can use various tools and methods to implement your risk mitigation plan, such as risk action plans, risk owners, risk committees, or risk policies. By implementing your risk mitigation plan, you can ensure that your risk mitigation strategies are executed consistently and effectively across your company.

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5 Monitor and review your risk performance

The fifth step in financial risk management is to monitor and review your risk performance, which is the process of measuring and evaluating the results and outcomes of your risk mitigation strategies. You can use various tools and methods to monitor and review your risk performance, such as risk dashboards, risk reports, risk audits, or risk reviews. By monitoring and reviewing your risk performance, you can track the progress and effectiveness of your risk mitigation strategies, identify any gaps or issues, and make any necessary adjustments or improvements.

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6 Learn and improve from your risk experience

The sixth step in financial risk management is to learn and improve from your risk experience, which is the process of capturing and applying the lessons and insights that you have gained from your risk management activities. You can use various tools and methods to learn and improve from your risk experience, such as risk feedback, risk surveys, risk workshops, or risk best practices. By learning and improving from your risk experience, you can enhance your risk management skills and capabilities, foster a risk-aware culture, and increase your resilience and preparedness for future risks.

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Shanique Elaine Harvey

ISO 31000 Certified Risk Manager
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This is an all important step that should incorporate the board, top level management and the risk management function of the company. The board should utilize this information to make adjustments if necessary to create a more risk-aware culture and to empower the risk management function within the organization. By doing this other staff will make an active effort to ensure that they uphold the risk culture.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you use financial risk management techniques to protect your company from unexpected events?

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1 Identify your risk exposure

2 Assess your risk tolerance

3 Select your risk mitigation strategies

4 Implement your risk mitigation plan

5 Monitor and review your risk performance

6 Learn and improve from your risk experience

7 Here’s what else to consider

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