How the levels of risk can be linked to the financial loss values

The possibility of financial loss is one of the important factors considered when assessing any risk. However, how can we link the financial values of losses to each level of risk, for example, "high," "moderate," and "low?"

To answer this question, I will give an example. Let's assume that you have $1,000. If you are robbed, how much money will you consider a high, medium, or low loss? You will think a little bit before answering that 600 dollars out of 1000 are for basic expenses such as food and house rent. So you will consider stealing more than $400 as a high loss.

In the same way, you may consider stealing $200–400 as a moderate loss because the loss will only affect your less important needs. As well, you could consider stealing less than $200 as a low loss because it will affect your savings for this month only. So, with this example, we can say that the degree of financial loss can be measured by knowing the impact on the operations, in the example that we have mentioned, personal life was the process in which we assessed the impact.

Accordingly, you can evaluate and classify the financial impact of your company by determining how much of your loss will lead to an inability to pay the debts, which leads to a downgrade of the credit rating (high). How much you lose will lead to the inability to pay salaries, suppliers' sums, or purchase raw materials (high). How much if you lose will only partially affect the company's operations cash flow and can only lead to an increase in debt within the acceptable level to compensate for the loss ( moderate), and how much if you lose will only lead to losing part of the profit margin ( Low).?

Answering these and other questions may help you to determine the financial amounts of loss for each level of risk by identifying and assessing the impact. Of course, you may also need to know other rates and indicators related to cash flow, such as inventory and accounts receivable turnover rates, the duration of the cash cycle, and the rate of financial liquidity, as these rates may be useful in determining the impact of a loss.

Mohamed El Gabry