How to Manage Financial Risks Well and Correctly

The term risk or risk is the loss of money or other valuables. This is closely related to business management, and we will review about managing financial risk, in which there is a forecasting process for making decisions that you will do in the future.

In making these decisions, there must be something that is detrimental to your business finances, this is called financial risk. In the article will be explained about managing financial risk and how to manage it? In every business activity there is always risk, with risk management you can reduce and minimize the risk of existing losses.

How to Manage Financial Risks Well and Correctly

Understanding Financial Risk

Financial risk is all forms of decisions related to finance that cause losses. Financial risk is closely related to finance such as the effect of transactions on the balance sheet, work contract obligations, maturity of debt payments, company liquidity risk and things that reduce financial flexibility.

Identification of risk management is known as risk management, which does not only identify but analyzes risk responses in a formal, consistent and comprehensive manner so as to create benefits.

Understanding Risk According to Experts

The following is the definition of risk according to the experts.

1. Arthur Williams and Richard, M.H

Understanding risk according to Arthur Williams and Richard, M.H is a variation of the results that can occur during a certain period.

2. A. Abas Salim

Understanding risk according to A. Abas Salim is uncertainty (uncertainly) that may give birth to a loss event.

3. Soekarno

According to Soekarno, the definition of risk is the uncertainty of the occurrence of an event

4. Herman Darmawi

The definition of risk according to Herman Darmawi is the distribution/storage of the actual results from the expected results.

5. Herman Darmawi

The definition of risk according to Herman Darmawi is a result (outcome) that is different from what is expected.

Performing Financial Risk Management

The steps to carry out risk management so that financial risk can be managed properly, among others:

1. Start with Risk Identification

The first step is to understand and know to find the risks that may arise in your business. You can find out a predictive picture that can occur in the future, so that decision making is fast and directed. Methods of identifying risks include:

– Define risk units

– Understand business processes.

– Determine the goods and people involved in the activity.

– Determine the form of loss that can occur.

– Determine the cause of the risk

– Make a list of risks.

2. Make an Assessment Indicator of Each Risk

You can make an indicator of the level of loss that will occur and the possibility that it will occur. In this case, accuracy is needed in providing an assessment of each identified risk and adequate knowledge for the assessor so that the objectives are achieved.

3. Financial Risk Response

You are asked to be able to choose and implement the right steps in managing risk because it is a big challenge for you business owners to make strategic decisions that will be carried out based on the responses that have been identified. The responses to these risks are as follows:

  • Risk Avoidance, Taking action to stop activities that can cause a risk to occur.
  • Risk Reduction, Taking action to reduce the likelihood of a risk occurring.
  • Risk Sharing, Taking action to transfer some risk.
  • Risk Acceptence, Choose not to take any action to mitigate the risk, but to accept the risk occurs.

4. Make a Risk Management Plan Table

By creating a risk management plan table you can overcome the risks that occur and provide an illustration of what kind of risk you will look at. In making a risk management table you must ask for a response and permission from the company leadership.

5. Action Implementation

In its implementation, you must consistently carry out the methods that have been agreed and planned at the beginning so as to reduce the risk of loss. Moreover, regarding the implementation, it will be a fatal mistake if you do not understand and understand the purpose of doing this risk management. So it takes a deep understanding before doing risk management.

6. Monitoring, Evaluate and Review

These three processes are the final step in carrying out risk management, so that a systematic structure is neede from the beginning in terms of planning, evaluating and providing notes on the risks that are observe.

If there is a change in the risk management plan that has been made and planned, a replacement must be made directly, therefore it is necessary to change the plan to overcome or reduce the risks that may occur.

Types of Financial Risks and Solutions

  • Financial planning is one of the important things to do in achieving life goals. In doing financial planning, one of the things you need to anticipate and manage is financial risk.
  • The risk of causing losses if not anticipate from the start. So to be able to anticipate and manage risk, we must know the various financial risks that can occur. What are the types of financial risks that we need to anticipate? Check out the following description
  • Financial risk is a risk whose impact can be assesse or measure in money. Base on the time period, financial risk can be divide into short-term risk and long-term risk.
  • Short-term risk alias needs that arise unexpectedly in the short term. Examples are illness or loss or damage to productive assets, such as a broken/lost motorbike.
  • This causes us to be unable to work as usual for a while or require additional costs such as costs for medical treatment or repairing something that is damage.
  • To anticipate these risks, you can buy health insurance or vehicle insurance. Next is the long-term risk, namely unforeseen circumstances that cause financial losses in the long term. An example of a long-term financial risk is death.

For a family breadwinner, death causes the loss of the main source of income in the family. So, you can buy life insurance to manage this risk. In addition to the time period, financial risk can also be classifie as follows:

1. Pure and speculative risk

Pure risk is a risk that if it occurs it will cause a genuine loss, for example if the vehicle breaks down or is damage so that it cannot be use for work. Meanwhile, speculative risk is a risk that has the potential to cause losses due to the possibility of very small profits.

An example is someone who invests just following the trend without knowing the characteristics and risks of the chosen investment product.

2. Specific and fundamental risks

Specific risk is a risk that occurs only personally and the impact is felt locally, for example, a fire in a house is only felt by people who own the house and the environment around the burning house.

Meanwhile, fundamental risk is a risk which in the event of the impact of losses can be very broad or catastrophic, for example, natural disasters that hit an area. In both examples, one of the instruments that you can use to manage this risk is to have property insurance.

3. Static and dynamic risk

Static risk is a risk that is not affecte by economic conditions, such as the possibility of loss of property due to fire and theft. On the other hand, dynamic risk is any form of risk of loss due to changes in the economy, such as fluctuations in currency values, stock values, or inflation.

Unlike other risks that can be insure, dynamic risk is a type of risk that cannot be insure. What can be done to anticipate dynamic risk is to diversify assets and investment instruments, for example by combining assets in the form of property, gold, stocks, bonds, and mutual funds.

Also read: 10 Easy Ways to Achieve Financial Goals Without The Hassle

After we know the types of financial risks, we will understand better what things must be anticipate to minimize losses from a risk. Well, there are several insurance products that you can use to minimize these losses, including:

  • Life insurance
  • Health Insurance
  • Property Insurance

In addition to insurance, it is very important for us to diversify assets and have an emergency fund that can be use to anticipate unexpecte events. Come on! careful in knowing financial risks and wise in using financial products to minimize financial losses.

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