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A business organization can be better positioned to mitigate their financial impact by identifying and monitoring risks.
The four key approaches to mitigating financial risk are
Avoidance covers changing course to eliminate the factors causing the financial risk. Reduction takes the approach of managing through the risk but with measures that help minimize its effects. Transference means off-loading or sharing some of the risk with other parties. These parties can be business partners or insurance agencies.
Finally, acceptance is to move forward, accepting the potential results of the risk rather than taking action to mitigate or avoid it. As a business administrator, you may choose a particular approach based on the type of financial risk involved. Also, you can opt to combine multiple approaches to address a financial risk as well.
The right financial technology can prompt other tactics for minimizing financial risk. Robust technology, such as cloud-based accounting software offered under NetSuite and integrated enterprise resource planning (ERP) systems, helps identify and analyze trends that might become risks — or opportunities. NetSuite financial management is proven useful for planning and developing metrics and reduces the potential for manual errors in record-keeping.
As Accounts Receivable balances age, collection becomes less likely. Uncollected Accounts Receivable results in lost revenue, reduced cash flow and lost profits. Here, NetSuite Financial Software plays an important role and help you stay on top of the balances by using an AR aging report. These reports track the payment status of a company’s Accounts Receivable and other similar tools. Additionally, Account Receivable vigilance can uncover customers that present credit risks so future sales terms can be adjusted to save future losses.
Insurance transfers some financial risk to a third party. It comes in handy when paying for an unexpected loss and preserves company capital. However, one should keep in mind that insurance policies carry premium costs. Although the proceeds of a claim can help finance recovery, they don’t eliminate the risk or the disruption including product liability, crime, commercial property claims, workers compensation, business interruption, and cybercrime.
By optimizing operational efficiency with the best NetSuite Financial Management Software, a business can unlock cash flow. It can be redirected to cover the impact of financial risk. Additionally, the process of continually evaluating aspects of a business assists in identifying potential business risks.
You can establish cash reserves to be prepared for the impact of financial risks. Along with insurance, emergency funds help lessen financial losses and ensure business continuity. Emergency funds can be internally generated via positive cash flow or they can be in the form of an accessible line of credit.
When you institute strong QA measures, you make sure that products and services meet desired quality standards. This is an effective way to reduce product-related financial risks. Checklists, checkpoints, sampling and supervision throughout the production process can help ensure better financial outcomes.
Many businesses, whether SMEs or Leading Giants, rely on loans from time to time to support gaps in cash flow and for long-term investments. However, they must manage leverage risk by keeping loan balances as low as possible to avoid excess borrowing costs. These costs include interest charges and bank fees. Also, heavy cash flow drains from inflated loan payments. Additionally, lower outstanding loan balances can optimize a company’s available credit for emergencies and unforeseen financial risks.
Businesses must keep quality records to manage financial risk as it provides clean data for historical analysis and future visibility. Also, it’s a primary and fundamental way to avoid compliance risk. Businesses have many reporting requirements from lenders, government agencies, industry regulators and shareholders to meet regulations, standards, compliance, and abide by the law.
Creating a cash management strategy helps reduce financial risks through planning and prevention as running out of the cash is one of the most potential reasons for business failure. Forecasting cash inflows and outflows, monitoring AR and accounts payable balances, managing debt payments, tracking currency exchange and interest rates and responding to market demand help develop a cash management strategy to lower risk.
Your workforce or employees have a big impact on the success or failure of your business. This is especially evident in services industries as there is a direct correlation between the adequacy of employee training and business output. Hence, investing in employees reduces the risk of costly errors that can impact a company’s reputation adversely.
Outsourcing can save time because expertise is already in place and the financial risk is shared between the company and the service provider. In this way, and cost savings can be used to reduce risk in other areas of the business. Beware, though, that while outsourcing can reduce some financial risks, it may introduce others, so it’s important to evaluate where it makes sense.