How to manage your business’ financial risks
How to manage your business’ financial risks
Financial risk is one of the most important considerations for any business because it affects cash flow.
There are obvious risks to your business finances like increasing costs of electricity, fuel, salaries, and suppliers, but you need to know how long your business will be able to function if the income suddenly stops coming in, if the market crashes for instance.
So the first thing you need to do before you create a financial recovery plan is identify the possible financial risks your business could face.
Identify and prioritise your financial risks
When you look at the potential risks to your company’s finances, you need to consider the level of seriousness each of the risks pose to your business and the likelihood of it ever occurring. Answer the following questions related to each financial risk.
- What’s the chance of this risk happening in my business?
- How will the occurrence of this risk impact my business?
Once you have this list of possible risks, you need to take steps to ensure that you have plans in place to mitigate these risks. This will help you to take control of your financial situation and be prepared for anything.
Seven of the most common financial risks you need to manage closely
- Monitor your businesses credit score closely
If your business deals with suppliers, banks and other creditors, you need to make sure that you pay your debts on time. Not only will this allow you some flexibility in negotiating payment terms if your income slows down, it will also elevate your reputation and help you secure preferential pricing ahead of your competition.
- Maintain strong relationships with your bank
To maintain a strong credit record, you need to ensure that your relationship with your bank is kept in pristine condition. Pay your loans on time and don’t allow your bank account to fall into negative territory. If financial trouble hits and you need urgent financial assistance, your bank will be the first port of call.
- Only grant credit to customers who can afford it
If your business provides products and services to clients on a credit agreement basis, you need to follow strict credit management rules. Do thorough credit checks on all your clients to ensure that they are able to afford the terms of your sale agreements. This means you need to implement a strict credit application for any new clients.
- Implement reasonable payment terms for your clients
It is important to maintain strong relationships with your clients, especially when it comes to you collecting money from them on a monthly basis. You need to ensure that you set reasonable payments terms to ensure that enough money comes in order to settle your expenses. Structuring unreasonable payment terms will result in your clients defaulting on their payments, reducing your income and increasing the costs on your business to collect the outstanding money.
- Manage late payments effectively
Times are tough. Even if you conduct thorough credit checks on your clients, chances are, you’ll still have to deal with late payments. Where possible, you could implement the following processes:
- Where possible make sure that you own the goods until it is paid for
- Charge interest on late payments
- Implement a strict methodical collection process
- Ensure that this process is followed closely
- Have a retrenchment plan in place
Unfortunately staff are an expense that you probably won’t need all of if you are servicing less customers so have a retrenchment plan in place that can kick in quickly so you can save money.
- Conduct regular internal financial audits on your business
The purpose of an internal audit is to ensure that your business is running effectively. You could hire an external company to conduct the audit for you, or if you have the expertise in house, you could conduct the audit yourself. The auditors must report back to the owner or the directors of the business. The aim of the internal audit is to help you develop better risk management schemes for the company.
- Welcome external financial audits on your business
External auditors are usually employed by the company’s shareholders. These auditors don’t work for your business but are an independent body that makes sure that your business finances are being properly managed. For this reason it is important to keep your business finances 100% in check. You need to provide the auditors with everything they need to conduct a thorough assessment of your business.