Risk management in finance is concerned with recognising the daily risks in the market. It entails assessing the financial risk that the company is facing and devising a strategy to mitigate the risk while also preventing similar dangers in the future. The four steps in an overview are identifying the risk, assessing the risk, controlling the risk, and reviewing the controls. There are various types of dangers, including: -
1. Risk of Operation: - It is the risk that the company is directly or indirectly exposed to, such as the loss of property, plant or machinery, power outages, unqualified staff, legal threats, environmental risks, and so on. However, this type of risk can be managed by calculating the cost tolerance based on the situation.
2. Credit Risk: - This risk arises when a borrower is unable to pay the interest on the debts they have taken out or when collection costs rise, for example. It might also happen as a result of late payments from clients. To reduce these risks, the organisation should conduct credit checks on its customers and the businesses it does business with.
There are also other dangers, such as reputational risk and currency risk.