What Is Financial Risk Management?

Financial risk management includes identifying, assessing and addressing potential threats to a business’s financial resources.

Written by Matthew Urwin
Published on Jan. 03, 2023
What Is Financial Risk Management?
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REVIEWED BY
Kristen Pascoe | Jan 09, 2023

While companies may eliminate some threats, the goal of financial risk management is to reduce the probabilities of risks occurring in the first place. This approach has become an essential skill for chief information officers since they need to sustain operations and keep a business on solid financial ground.

 

What Are the Stages of Risk Management?

To ensure a thorough understanding of risks, teams need to develop a system for determining and targeting threats.

While identifying risks may sound like an obvious step, it’s not always easy to spot all potential scenarios for risk. For example, teams with return-to-office plans need to consider health issues, government rules and employee preferences. A company may even lose out on future gains if available talent isn’t drawn to an in-person setting. 

Once leaders have a clear view of all threats to the organization’s operations and finances, they need to figure out how likely risks are to happen and what they can do to mitigate any occurrences. For example, if a business wants to avoid project inefficiencies, it can construct a culture of transparency to encourage trust and group cohesion. After teams set up a plan, they should still monitor the situation and make any necessary adjustments to the risk management process.

Related Reading From Built In ExpertsHow to Monetize Your Product During a Recession

 

What Are the Tools Used in Risk Management?

With a slate of tools and techniques, business leaders can tailor their risk management strategy to their unique situation.

There are plenty of methods to go about crafting a risk management process. A Strength, Weakness, Opportunity and Threat (SWOT) analysis helps teams understand their strengths while spotting potential weaknesses and areas for improvement. Once groups finish brainstorming, they can record their findings and make strategic plans. 

However, even more powerful technologies are becoming accessible. Small businesses have come to rely on AI risk management solutions, which deliver accurate forecasts and valuable guidance. With increasing capabilities, tech is streamlining thoughtful processes and enabling businesses to anticipate financial threats at a much faster pace.

Financial Risk Management Explained in 5 Minutes. | Video: Ryan O'Connell, CFA, FRM

 

What Are the Benefits of Risk Management?

Implementing a risk management strategy enables teams to adapt when things don’t go according to plan.

A risk management process is essential for offering clarity and confidence to all those involved in an organization. Without a strong understanding of risks, projects remain subject to uncertainty and inaccurate projections. Establishing realistic expectations removes the guesswork and allows teams to better handle roadblocks when they arise. 

By talking openly about risks and worst-case scenarios, companies can also encourage a more open environment. Communication is key to smoothing over critical periods, for example, when a leader leaves an organization. That’s why many businesses create succession plans and strategies to be prepared. Rather than weaken morale, risk management strengthens trust since everyone knows there’s always a plan.

This content is for informational and educational purposes only. Built In strives to maintain accuracy in all its editorial coverage, but it is not intended to be a substitute for financial or legal advice.

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