What are the different types of risk businesses should be aware of?

Mountaineer faces several dangers along a snowy ridge in Mont Blanc, France - In the business world, there are several dangers that can impact a business.

As a Chief Financial Officer (CFO), understanding the risks and challenges that businesses face is key to developing your own effective risk management strategies. We look at three types of risk that can impact revenue and profits.

Running into risk is unavoidable. In the business world, there are several dangers that can impact a business. From market volatility to natural disasters, the list is extensive. Many would argue that it is far more effective to prepare for (and limit the impact) of those risks beforehand, rather than allowing the worst-case scenario to unfold. In business, that’s where risk management strategies come in (read more about mitigating the risks ).

So, what are the types of risk to plan against?

Business Risk

Business risk refers to a company’s exposure to factors that will cause its profits to decline or lead to its overall failure. It is largely due to factors such as growing competition or changes in market conditions.

A CFO is likely to keep business risk on their radar as, depending on the size of the risk, it can have a real impact on the company’s ability to generate revenue and profit.

As such, having sound contingency plans in place to mitigate this type of risk is essential to staying ahead of the curve.

Financial Risk

Financial risk, however, refers to how financial conditions can impact a business. Examples include changes in interest rates or fluctuations in the value of investments.

Businesses within the financial sector, such as banks and brokerage firms are generally exposed to this type of risk – and in some cases can benefit greatly. For example, when interest rates rise, a bank’s profit margins are likely to expand.

On the other hand, businesses within the luxury products or services sectors may be negatively impacted by a rise in interest rates. This is because, when borrowing costs rise, consumer spending is likely to decline as those with debts will have to pool funds towards paying higher interest (rather than spending on goods and services).

For smaller businesses who have long-term loans or would like to take out short-term ones, a rise in interest rates can make this more difficult. Their ability to expand or pay for unexpected expenses becomes limited which can short-circuit growth for months, or even years.

Currency Risk

Currency risk, which is sometimes called exchange rate risk, specifically refers to how volatility within the currency markets creates the potential for businesses to experience losses. Companies who transact across international borders, or those with exposure to foreign currencies are more likely to experience this type of risk.

Like financial risk, currency risk can also impact a company’s bottom line. For example, if a company based in the UK sells goods or services to customers in Europe or the United States and the value of the pound falls relative to the euro or US dollar, the company will receive less euros or dollars for its products. In the grand scheme, this can impact the company’s revenue and profits.

Companies exposed to currency risk should have effective risk management strategies in place. We offer plenty of bespoke services and solutions which help to protect SMEs and corporates mitigate their currency risk, one being SmartHedge (learn more about it here). We also offer services such as forward contracts.

How to protect against the risks

Ultimately, understanding the different types of risks that can impact your business is crucial for any CFO. While business risk and financial risk are important to keep on top of, currency risk is largely important for businesses with exposure to foreign currencies.

Smart currency Business are experts on currency risk and provide a range of currency services. By implementing effective risk management strategies such as hedging and diversification, businesses can protect themselves against currency risk and ensure the long-term success. Call our team today on 020 7898 0500. We will be delighted to help you mitigate your currency risk.