Basic types of financial risks

Financing risks

Financing risks refer to changes in the capital supply and demand market and the macroeconomic environment, and how companies raise funds to achieve financial results. bring uncertain financial risks. Financing risks mainly include interest rate risk, refinancing risk, financial leverage effect, exchange rate risk, purchasing power risk, etc. Interest rate risk refers to changes in financing costs due to fluctuations in financial assets in the financial market; refinancing risk refers to changes in the types of financial instruments and financing methods in the financial market, which lead to uncertainty in the refinancing of the enterprise, or the financing structure of the enterprise itself. Unreasonable factors lead to difficulties in refinancing; financial leverage effect refers to the uncertainty caused by the use of leverage financing by enterprises to the interests of stakeholders; exchange rate risk refers to the uncertainty of enterprise foreign exchange business results caused by exchange rate changes; purchasing power Risk refers to the impact on financing due to changes in currency value.

Investment risk

Investment risk refers to the risk that after an enterprise invests a certain amount of funds, the final return will deviate from the expected return due to changes in market demand. Enterprises' external investment mainly takes two forms: direct investment and securities investment. In our country, according to the provisions of the Company Law, shareholders owning more than 25% of the company's equity should be regarded as direct investment. There are two main forms of securities investment: stock investment and bond investment. Stock investment is a form of investment that carries no risks and enjoys the most benefits; bond investment has no direct relationship with the financial activities of the invested company and only charges fixed interest on a regular basis. The investor faces the risk of being unable to repay the debt. . Investment risks mainly include interest rate risk, reinvestment risk, exchange rate risk, inflation risk, financial derivative risk, moral hazard, default risk, etc.

Business risk

Business risk, also known as business risk, refers to the influence of uncertain factors in all aspects of supply, production and sales during the production and operation process of the company. The lag in movement produces changes in corporate value. Operating risks mainly include procurement risks, production risks, inventory realization risks, accounts receivable realization risks, etc. Procurement risk refers to the possibility of insufficient supply due to changes in raw material market suppliers, as well as the deviation between the actual payment period and the average payment period due to changes in credit conditions and payment methods; production risk refers to the possibility of insufficient supply due to changes in information, energy, technology and personnel changes leading to changes in the production process, as well as the possibility of shutdowns for materials or delayed sales due to insufficient inventory; inventory realization risk refers to the possibility of product sales being blocked due to changes in the product market; realization of accounts receivable Risk refers to the possibility of increased management costs of accounts receivable due to excessive credit sales, and the deviation of the actual recovery period from expected recovery due to changes in credit sales policies.

Inventory management risk

It is crucial for an enterprise to maintain a certain amount of inventory for normal production, but how to determine the optimal amount of inventory is a more difficult problem. Too much inventory will lead to a backlog of products, occupying company funds, and higher risks; too little inventory may lead to untimely supply of raw materials, affecting the company's normal production, and in severe cases, it may cause breach of contract with customers and affect the company's reputation.

Liquidity risk

Liquidity risk refers to the possibility that corporate assets cannot transfer cash normally and deterministically or that corporate debts and cash payment obligations cannot be performed normally. In this sense, the liquidity risk of an enterprise can be analyzed and evaluated from the two aspects of the enterprise's liquidity and solvency. Problems arising from a company's ability to pay and repay debt are called cash shortage and cash inability to repay risks. Problems that occur because corporate assets cannot be transferred into cash with certainty are called liquidity risks

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Measures

Overview

Enterprise financial risks exist objectively, so it is impossible and unrealistic to safely eliminate financial risks. For corporate financial risks, only possible measures can be taken to reduce their impact to a minimum.

Main measures to resolve financing risks

When an enterprise encounters difficulties with insufficient funds for its business operations, it can raise the required capital by issuing stocks, issuing bonds, or borrowing from banks.

Main measures to resolve investment risks

From the perspective of risk prevention, investment risks should be reduced mainly by controlling the investment period and investment types. Generally speaking, the longer the investment period, the greater the risk, so companies should try to choose short-term investments. When investing in securities, you should adopt a diversified investment strategy, select several stocks to form an investment portfolio, and reduce risks by offsetting the risks in the portfolio. In the risk analysis of stock investment, the β coefficient analysis method or the capital asset pricing model can be used to determine the risks of different security portfolios. The β coefficient is less than 1, which means that its risk is less than the average risk of the entire market, so it is a less risky investment object.

Main measures to resolve exchange rate risks

(1) Select the appropriate contract currency. In economic transactions such as foreign trade and lending, the choice of currency as the pricing currency is directly related to whether the transaction entity will bear exchange rate risks.

In order to avoid exchange rate risks, enterprises should strive to use the domestic currency as the contract currency, use hard currency when exporting products and capital, and use soft currency when importing capital. At the same time, measures such as value preservation clauses should be added to the contract.

(2) Through hedging operations in the financial market. The main methods include spot exchange trading, futures trading, futures exchange trading, options trading, borrowing and investment, interest rate-currency swaps, foreign currency bill discounting, etc.

(3) The translation risks generated by economic entities in the balance sheet accounting process are generally resolved by implementing balance sheet hedging. This method requires that the amount of insured assets and insured liabilities expressed in various functional currencies on the balance sheet is equal, so that its translation risk position is zero. Only in this way, exchange rate changes will not cause translation losses.

(4) Business diversification. That is, by diversifying its sales, production and raw material sources internationally, through the diversification of international operations, when the exchange rate changes, the management department can compare the changes in production, sales and costs in different regions to find advantages and avoid disadvantages, and increase sales. A change in the exchange rate is beneficial to the production of branches, while a reduction in the exchange rate is unfavorable to the production of branches.

(5) Financial diversification. That is to seek the sources and destinations of funds in multiple currencies in multiple financial markets, and implement diversified financing and investment. In this way, when some foreign currencies depreciate and some appreciate, the company can make most of the funds available. Foreign exchange risks offset each other to achieve the purpose of risk prevention.

Financial Risks

Main Measures to Resolve Liquidity Risks

The highly liquid assets of an enterprise mainly include cash, inventory, accounts receivable and other items . The purpose of preventing liquidity risks is to maximize benefits while maintaining the liquidity of asset flows and financial risks. Therefore, optimal cash holdings, optimal inventory levels, and accelerated collection of accounts receivable should be determined. We all know that holding cash has a time cost problem. If you hold too much cash, you will obviously lose other profit opportunities due to higher capital occupation. If you hold too little cash, you will face insufficient funds. Liquidity needs risk. Therefore, companies should determine an optimal amount of cash holdings to maximize benefits while preventing liquidity risks.

Main measures to resolve operating risks

With other factors remaining unchanged, the more stable the market demand for an enterprise's products, the more certain the enterprise's future operating income will be, and the lower the operating risk will be. The smaller it is. Therefore, when an enterprise determines what kind of products to produce, it should first conduct research on the product market. To produce marketable products, the sales price is one of the determinants of product sales revenue. The more stable the sales price, the more stable the sales revenue. The more stable the company's future operating income will be, the smaller its operating risks will be.