By Helena Ama Cromwell
Risks is presented in various forms but can be branded as the chance that an outcome or investment’s actual returns will differ from the expected outcome. This includes the possibility of losing some or all of the original investment. Yet, implementing a good risk management strategy is vital to run a sustainable and successful business.
Financial risk is a form of risk that applies to businesses, government entities, the financial market, and an individual. This risk is the danger or possibility that shareholders, investors or other financial stakeholders will lose money.Typical of this type of risk are credit risk, currency risk, liquidity risk, and operational risk.
Credit risk is the hazard associated with loaning money to another person. Creditors might face decrease income from the loan as well as the loss of principal capital and interest should the borrower fail to pay. On the other hand, currency risk is the peril that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.
Liquidity risk comes in two sub-categories, the market liquidity risk, and funding liquidity. Market liquidity risk is the situation where there are more sellers to buyers hence assets cannot be purchased quickly to cut losses. And funding liquidity risk is the possibility that a corporation will not have the capital to pay its debt, forcing it to default, and harming stakeholders.
Finally, operational risk is a comprehensive term that covers all the other risks a business might encounter in its daily operations. Staff revenue, theft, fraud, lawsuits, idealistic financial projections, poor budgeting, and inaccurate marketing plans can all pose a risk to resources of the company if they are not anticipated and handled correctly. This is the risk of having poor management or flawed financial reasoning based on internal factors.
During the global financial crisis in 2007/ 2008, the monetary well-being of the marketplace was immensely affected which collapse businesses, investors lost fortunes, and governments were forced to rethink their monetary policies.
Furthermore, the world’s largest agricultural commodity trader Cargill, in 2011 reported a 66 percent decline in first-quarter profits. It made a profit of $236 million in the first three months, compared to $693 million in the first three months of 2010. Concurrently, revenues rose by 34 percent to $34.6 billion, which, when combined with the fall in profits, meant that Cargill suffered a significant reduction in its profit margins. The company indicated that the significant instability in financial and commodity markets and in particular its results reflected the “stress in financial markets caused by growing economic, fiscal and political concerns on both sides of the Atlantic”.
Risk is inherent in any business enterprise, and implementing good risk control is an essential aspect of running a successful business. Thus, the current global financial market regulatory requires that financial institutions must devise risk management and actuarial functions established to address risk management challenges.
Financial risk management is the task of understanding and monitoring financial risks in order to manage its impact. It is a sub-discipline of the wider function of risk management and an application of modern financial theory and practice.
Companies may manage their financial risk in many diverse means depending on the activities of the company, its aptitude to the risk and the level of risk it is prepared to accept.
This management practice is significant in this ever-changing world and it cut across all areas in finance. Government agencies, the private sector, Non-Governmental organizations and financial institutions such as the World Bank, the International Monetary Fund (IMF), Central Banks, employ it as an effective mechanism in formulating financial regulation policies.
In August 2011, the rapid rise in the Japanese yen (JPY) against the US dollar and the euro prompted the Japanese government to offer short-term financial support to exporters hurt by the yen’s strength. Over the years, the JPY rose from JPY95 to the US dollar to JPY76 to the US dollar a post-war record and a currency appreciation of 25 percent.
Financial risk management is massively important because the inability to efficiently control perils results in crisis and missed opportunities. It helps an organization prepare for the unexpected, while everything cannot go as planned, it can try to minimize the effects felt by such circumstances.
Financial risk management gives peace of mind and allow an organization to weather the notorious storms with a controlled amount of damage. Therefore financial institutions in Ghana must endeavor to educate their management and staff on financial risk management during this challenging times for financial institutions in Ghana.
Periodic training to update and upgrade the knowledge of management and staff on financial risk management will promote efficient operational risk management for the institution and boost growth.
By Helena Ama Cromwell