You're facing multiple financial risks. How can you tackle the most critical ones first?

One time at work, we faced a financial crunch due to unforeseen market shifts. The first step was identifying all potential financial risks, including liquidity risks, credit risks, and market risks. We did this through brainstorming sessions with key stakeholders and reviewing our financial statements. In my experience, taking time to comprehensively list out all possible risks helps in setting the stage for deeper analysis.

Financial risk refers to the uncertainty produced in the performance of an investment, due to changes in the sector in which it operates, the impossibility of repayment of the capital by one of the parties and the instability of the financial markets.

In my experience, simply identifying risks isn’t enough. We then assessed the potential impact of each risk on our organization’s financial health. This involved analyzing worst-case scenarios and understanding how each risk could affect our cash flow, profitability, and overall financial stability. This step allowed us to distinguish between minor setbacks and those risks that could cripple the business.

Credit risk occurs when one of the parties to a financial contract does not assume its payment obligations. For example, if a buyer obtains a loan to buy a car, he is committing to return that money with interest. Credit risk is linked to the possibility of default on the debt. Another impact, the liquidity risk, when one of the contractual parties has assets but does not have sufficient liquidity with which to assume its obligations. When a company cannot meet its short-term debts or sell its current assets, said company is faced with a situation of illiquidity. In addition, it may also happen that a company may find itself in a phase of continuous portfolio losses, until the moment comes when it cannot pay its workers.

Based on an assessment of risk impact and likelihood, utilizing qualitative and quantitative approaches, in conjunction with KPI's that aligned with the Board's risk appetite, risks were prioritized that warranted more attention and resources. For example, during the period of the recent rising interest rates cycle, the leverage ratio was being constrained against comfortable tolerance ratios, reflected in part by KPIs that were triggered based on a clear risk appetite statement on capital adequacy. This became one of the high priority risks whereby appropriate contingency actions, following existing policies, were taken, such as slowing down buy backs serving as a risk mitigant.

One thing I have found helpful is prioritizing risks based on their likelihood and impact. During one project, we used a risk matrix to categorize each risk as low, medium, or high priority. This helped us focus our resources on tackling the most critical risks first (I still use this method every day). The process of prioritization ensured that we weren’t spread too thin trying to manage every risk at once.

Prioritize the market risk, we find in operations within the framework of financial markets. Within this type, we distinguish three types of risk depending on market conditions. Eg the exchange rate risk is associated with the fluctuation of the exchange rate of one currency against another and mainly affects people with investments that involve a currency exchange.

In my experience, developing targeted strategies is key to mitigating identified risks. We crafted a risk management plan that included liquidity buffers, hedging strategies, and strict credit control measures. Each strategy was tailored to the specific risk, aligning with our overall business goals and financial capabilities.

As its name indicates, it refers to the risk that interest rates rise or fall at an undesirable time. This is the case if you have a mortgage and the Euribor, for example, rises. This is one of the most common risks. It is the risk that losses occur in a portfolio as a result of factors or operations on which said portfolio depends.

One thing I have found helpful is the immediate implementation of risk mitigation solutions, followed by continuous monitoring. We set up weekly review sessions to track progress and make necessary adjustments. Implementing solutions swiftly ensured that the critical risks were addressed before they escalated, and continuous monitoring allowed us to remain proactive in our risk management approach.

This is the first way to minimize risk, taking into account that the more information you have about what you want to invest in, the lower the risk will be. Gathering information is an important element, since if you know how to manage this information, it will allow us to follow an innovative business strategy that will help us decide on our products and services, react to our competition, anticipate changes that are taking place in the market, in technology, etc.

Diversify by planning an investment portfolio that balances high-risk operations with high-security ones. By having a professional administration, that is, highly specialized in the new trends of the financial system, we can get ahead in the face of these risks.

Investing is, in short, the process of buying assets that increase in value over time and provide returns in the form of income payments or capital gains. In the case of financial investments, these refer to transactions made in securities such as stocks, bonds, bills of exchange, bank deposits and other financial instruments.