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In the process of financing its projects, the enterprise may face several risks that may cause disruption or increase production costs. This risk is generally divided into three types:
A - In terms of goods in warehouses or raw materials, they are naturally subject to embezzlement or damage due to the length of storage time and not requested by customers or a fire inside the store.
All these are considered material risks that significantly affect the financial procedures of the institution and so that these revenues are reduced due to these risks.
B - The good management of the institution allows to achieve the expected objectives in the future or even to achieve better results and therefore the poor management of both ends of the project projectors cause the disruption of the completion time and the institution costs additional undesirable and the risks of management as technical risks.
The third type of risk is the economic risk, which is divided into two main types:
* The risk of a decline in the volume of demand for the final product or a decrease in the number of applications on the raw production produced for the enterprise and due to several reasons, including:
- Misjudgment of consumer desires and needs between lack of experience and lack of information.
- Big competition in the market.
- There is a shortage of goods produced. Any goods produced are valid only with complementary goods.
In contrast, there are several ways to avoid or reduce these risks, including:
- Set up reserves and budget allocations to meet any potential risk.
- In the case of misjudgment of the wishes of consumers can be met by agreeing on research and marketing studies.
- Insurance against theft, disasters and other insurance institutions.
2. Avoiding financing risks:
Financing risks are minimized and their impacts minimized in three ways:
A - The appropriate procedures that contain the special expenses:
Any type of risk can be reduced to some extent by increasing the expenditure on the precautionary measures. For example, the risk of interruption of production due to the shortage of a major material in the production may be eliminated if sufficient reserve is established from the stock of this material. New moving wheels are based on high-rise buildings so they resist earthquakes and of course require additional expenses
B - Converting the risk to regular costs and aggregating with similar risks Insurance:
The replacement of the results of the risks to the annual costs paid to the insurance companies undertake to compensate the latter for losses caused by any natural cause and paid in return for an annual payment called installment.
There are several types of natural hazards which can be gambling in the same way and convert them into regular annual costs through insurance and insurance such as fire hazards, floods, ship sinking and theft ....
However there are always two situations that must be available in order for the risk to be insured:
- The risk must be separate and independent.
- Risk should not increase.
C. Countering other risks in reverse:
Any risk of losses that accompanies profit opportunities is seldom found to find someone's loss useful for someone else.
Risk management is the identification, evaluation, and prioritization of risks
In finance, risk management is considred, "The process of analysing and identifying the ways to mitigate the risks in an investment decision".
Risk Management is identifying, ananlyzing, measurement of risk associated with finance and mitigation of these risk to minimize the risk to acceptable level.
MAKE PLANING FOR FUTURE TO SECURE YOUR INVESTMENT IN EVERY ASPECT IN SENCE OF INVESTMENT , STORAGE OF STOCK , RECOVERING CASH ON TIME , MAKE STRATEGY TO COMPITE YOUR COMPITATIORS .
In Finance -Risk is connected finacial health of the company.Those are volatility of foreign currencies,interest rates,commodities price,tax regulations etc..Finance Risk Management is identifying the above said risks in an organisation and reduce the probability such type of negative events and increse the short term and long term value to its stake holders.
The identification, analysis, assessment, control, and avoidance, minimization, or elimination of unacceptable risks. An organization may use risk assumption, risk avoidance, risk retention, risk transfer, or any other strategy (or combination of strategies) in proper management of future events.
Financial risk management is the practice of economic value in a firm by using financial instruments to manage exposure to risk: operational risk, credit risk and market risk, foreign exchange risk, shape risk, volatility risk, liquidity risk, inflation risk, business risk, legal risk, reputational risk, sector risk
In Finance Risk management is the identification, evaluation, and prioritization of the risks.
well , in short answer , When an entity makes an investment decision, it exposes itself to a number of financial risks.
Risk of a company is related to its stock , Interest coverage and Debt service coverage ratio practically otherwise there are market risk, politcal risk Geo political risk, industry risk etc which are exteral factors to a firm and non diversifiable and uncontollable.
1. Risk of a stock is denoted by beta. It is the volatility of return of stock in accordance with market return. Market beta is considered1 and stock beta is compared to market beta for calculating volatility in returns of stock. For example if a company stock beta is1.2 it means that the stock is% more volatile or riskier than market return. A stock of beta0. means it is% less riskier than market return.
2. Risk is aaociated with interest coverage of a firm for example interest coverage ratio EBIT/interest gives information about the company whether it is generating enough core operating income to cover its fixed interest for bank otherwise may become a potential defaulter in short term. Debt service coverage ratio gives information about the company whether it is generating enough net income to cover its interest as well as principal payment. It is the long term liquidity position of the company.
3. Risk of a firm can also be evaluated from FCFF( free cash flow available to the firm). Higher the FCFF lower the risk associated and vice versa.
Hence while evaluating risk we basically consider short term and long term iquidity position of the company. Ratio analysis is a popuar tool for risk evaluation.
How does minimise risk?
Companies minimise risk by following the ways as described.
1. Making intercorporate investments and taking position Minority active, Passive , proportionate and controlling.
2. Linking performance of employees to stock performance through SBC.
3. Through forward and backward integration
4. Investing in T Bills, Sovereign bonds, Debentures for assured returns.
5. In project financing companies evaluate risk by calculating NPV, IRR and Payback period of the project.
Tool used : A financial model is prepared based on assumptions and based on forecasted company financials risk is evaluated using valuation techniques
