Preparation is key when it comes to challenges and obstacles that can impact your company’s ability to thrive. No one can predict the future, but smart businesses can analyze and account for potential financial threats. This is how the most successful companies stay afloat in worst-case-scenario circumstances.
In order to be prepared for the unforeseen, a company’s best bet is to conduct a thorough financial risk analysis. It is good to review all possible hurdles and threats and create a plan that addresses all these obstacles. Therefore, a business can secure a peace of mind and a solid financial future, no matter what challenges are on the horizon.
What is a Financial Risk Analysis?
A financial risk analysis is a broad yet detailed assessment of the threats that could impact a company, the likelihood of these threats occurring, and the estimated costs if these situations occur.
Multi-faceted and far-reaching, a financial risk assessment must account for much more than just the obvious profit losses. For example, if a machine that is essential to your company stops working, you’ll have to account for the cost of repairing or replacing the machine to be sure.
However, you also have to consider the cost of downtime, the loss of productivity if production or service is interrupted, and the effect on your company’s public image. Financial risk analysis takes all of these direct and indirect impacts into account, and the analysis is performed for different risks.
Internal VS External Factors in a Financial Risk Assessment
When assessing risk, one of the key factors to keep in mind is external versus internal factors, which can impact a company’s operations.
An internal factor is produced by a company’s actions, such as the aforementioned broken machine, budget management, or product production or service issues. External factors are virtually impossible for an individual company to control. Also, this includes political, economic, or social changes that naturally impact a business. Recent examples of these external factors include the global Coronavirus pandemic or the rise in inflation that has been prevalent in the past year.
The Basics of Managing Financial Risks
A financial risk analysis is a complicated endeavor, but there are a few basic steps that apply when it comes to calculating your company’s potential challenges.
Identify the Obvious and Key Risks
The first step is to outline the most obvious and critical risks that could impact your company, such as costs, competitors, inventory, industry-wide changes, government regulations, personnel changes, etc.
Determine the Weight of Each Risk & Set Priorities
Once you have compiled a long list of potential risks, it’s time to create an order based on both the likelihood of these risks coming to fruition, and the overall cost to your company.
For example, if you have outdated devices or technology for one small aspect of your operations, these machines may likely need repairs at some point, but it may not be a costly setback. A global recession or decline in your industry could jeopardize your business. However, at the same time, it may not be as likely as a machine breaking down. All of these scenarios need to be weighed and judged to determine their probability, costs, and overall impact on your business.
Create a Plan and Safety Net
The solutions to reducing some risks may be inherently obvious, such as investing in new machines for outdated equipment, hiring IT personnel to safeguarding software and reducing cybersecurity risks. However, not all risks can be addressed in the same way, and you may be unable to control all of the threats on the horizon, especially when it comes to external factors.
As such, a financial safety net or savings account that aligns with the projected costs of these threats will provide peace of mind, and a backup plan to get your business through unforeseen events until a more successful future is on the horizon.
Understand Risks and Prepare for the Future with Saddock Wealth
There are multiple risk analysis methods and types of risk analysis, and a thorough investigation of potential threats is not a simple endeavor. It’s easy for companies to lose sight, miss possible threats, or underestimate or overestimate these problems’ costs if and when they occur.
This is where an experienced and knowledgeable partner can come into play. At Saddock Wealth we have decades of experience helping our clients through various financial hurdles. Additionally, we have the knowledge required to understand what risks may impact your business now, and well into the future.
Let’s discuss how we can help your business achieve peace of mind. You can’t expect the unexpected, but you can create a smart strategy that will secure your business’s future in the long haul. Reach out to us today for a consultation.