KPI of the Day – Risk Management: $ Financial risk
Measures the company’s inability to remunerate all of its capital owners, the shareholders and the creditors.
The model examines whether the company’s capital structure is adapted to its cost.
Financial risk is defined by all risk that can be otherwise related to financial aspects such as credit, stock market, foreign exchange, price volatility, liquidity, inflation etc. Similar to any kind of risk, financial risk is hard to source, quantify, measure and address.
The exposure to financial risk is even greater, as there are so many factors completely out of an organization’s control that can prove to be leading indicators of financial loss.
Apart from the nigh-impossible task of truly eradicating financial risk, there are several techniques that can help mitigate financial risk and minimize loss:
- Financial provisions and capital funds to cover unexpected losses;
- Risk assessments conducted at organizational level;
- Regular controls of individual business units;
- Hedging exposure to risk through third parties or derivatives.
In addition to this, the present model will be quite useful for anyone interested in determining both the financial risk and the economic risk of a company. That being said, this model has its limitations, which mainly derive from the user’s ability to predict costs.
Data collection requires advanced risk modelling and quantitative risk analysis per each of the categories of financial risk an organization is exposed to.
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