Starting a business is a commitment that goes beyond an eight-hour job, but once it’s up and running, it can be rewarding emotionally, physically and financially. However, establishing a new business requires a lot of preparatory work to ensure smooth operations from the outset. There’s a need to cover multiple grounds before launch, especially when it comes to anticipating financial risks.
While you’ll never be able to entirely prevent financial risk, preparing for it ahead of time can help in the future. Awareness is essential for saving money and time while safeguarding the trust, reputation and client base that you’re working so hard to establish.
So, if you’re wondering how you can mitigate the various types of financial risks that can arise, we’ve got you covered! Read this article to know the types of financial risks you should always be wary of when starting a business in the Philippines and the best practices to help your firm stay afloat during uncertain times.
What is Financial Risk?
Financial risk refers to anything that might jeopardize a company’s economic survival or ability to continue operations due to cashflow. It can occur when a company’s financial worth declines in the public market, the loss of revenues or prospective sales, loss of market share, staff absenteeism resulting in operations halting, stock theft, waste owing to inefficiency or financial risks associated with certain types of corporate transactions.
Financial risk is inherent in all organizations, and effective risk management is a critical component of a successful operation. A company’s management has varying degrees of control in terms of exposure to financial risk. Some hazards may be actively managed, while anticipating others may be entirely beyond the control of a business (e.g. the COVID-19 pandemic).
5 Financial Risks to Prepare for When Starting a Business
A business can, however, attempt to foresee prospective risks, analyze the potential effect on the business, and be ready to respond to unfavorable developments. With that in mind, here are five financial risks you should be aware of when establishing a company in the Philippines.
- Market risk
The industry’s unpredictability in which a company competes can often result in market risk. This has to do with rivals gaining a higher market share, lowering your company’s revenues. Ultimately, your firm can suffer market risk by falling behind in the changing market. It might be due to a lack of funding, ineffective operations, or outdated technology.
One example is the emergence of e-commerce, particularly during the COVID-19 pandemic. Consumers are doing more and more shopping online instead of visiting traditional physical stores. Depending on the industry, if a brick and mortar retail store is unable to move part of its business to an online model while the rest of its competitors in the industry have taken that approach, there may be a risk of losing a significant share of the market.
- Credit risk
Credit risk is the danger of your customers delaying or defaulting on their financial commitments to your organization. Funding and cashflow is vital in ensuring that your company can continue its core business operations.
Payment delays or defaults may significantly influence your cash flow. Non-payment by one or two significant clients can interrupt your business operations, depending on the size of your organization.
Credit risk is the reason why many businesses tend not to offer extended credit terms to new customers. However, after a client has sufficiently proven its ability to pay, a business may be more open to providing a longer credit line.
- Liquidity risk
Liquidity refers to a business’s capacity to convert its assets into cash quickly. The stronger your company’s capacity to pay off its short-term commitments as they emerge, the more liquid your firm will be. Debts that your business must pay within a year are called short-term debt obligations.
Liquidity risk occurs when your organization’s assets are difficult to convert into cash quickly. As a consequence, your business is unable to meet its short-term obligations. If a company fails to plan for or address its liquidity problems, there is a risk of bankruptcy down the line.
- Operational risk
Internal influences such as workers, systems, and procedures contribute to operational risk. Examples of operational hazards include inefficient inventory processes, potential disputes with suppliers or clients, personnel theft, and equipment malfunctions.
If the concerns above emerge, they might have a detrimental impact on your company’s finances. Your firm will not be able to earn as much income as expected if it is not running or operating at the predicted levels, and thus, it can eventually hurt your cashflow.
- Compliance risk
Non-compliance with statutory or regulatory standards poses a financial danger to your business. For instance, disregarding the Securities and Exchange Commission (SEC), Department of Labor and Employment (DOLE), Bureau of Internal Revenue (BIR), and other regulatory agency laws may result in significant monetary penalties for your firm.
Compliance risks can include missed or incorrect tax filings, incorrect corporate public records, and employee-related expenditures, taxes and contributions, to name a few.
Remember – as a business grows, the compliance requirements will usually become more onerous as that entails more employees, larger premises, new locations, additional shareholders and new markets. As such, a company seeking to scale should always consider having a risk and compliance function to ensure that every “t” is crossed and every “i” is dotted from the perspective of compliance.
Financial Risk Management Tips to Keep in Mind
“What gets measured, gets managed.”
This is a well-known quote often attributed to Peter Drucker – a popular guru for modern business management. Nowhere is it more relevant than in the world of business and company success. While risk is certainly an unavoidable consequence of doing business, it can be measured and managed.
While financial risks are just one risk category that a business faces, knowing and being prepared for these financial risks in business is just the starting point. Below are some expert tips and best practices to help you alleviate potential financial threats that might affect your business.
- Monitor cashflow regularly
Many enterprises fail due to a lack of sufficient funds. It’s important to ensure that you have enough funding to get you to the next stage or level of business. Additionally, if you’re aware that cashflow is going to be tight, run your operations conservatively but efficiently until your company gains traction.
- Establish an accurate accounting system
Work with an accounting provider or hire a qualified bookkeeper or Certified Public Accountant (CPA) from the start. This way, your numbers will be reliable and you can make strategic commercial decisions based on accurate underlying financial data. You will be able to forecast your break-even or profit analysis, and you might have greater confidence in avoiding potentially costly financial choices.
- Develop cashflow projections
Cash is king, and any firm that runs out of funds will be in a more than precarious position. Your most effective risk management approach is your cash management plan and how you intend to keep your business running over the next few years.
A tip to get accurate financial projections is availing of financial forecasting services to assist you in making better-informed decisions.
- Prepare for sudden drops in revenue
Small company entrepreneurs are pushed tight in various ways, including in aspects such as time, energy, personnel, and in many cases, cashflow. If your income suddenly dips, maintaining an open line of credit or ensuring you have back-up financing options available can sometimes be helpful to ensure the business continues running in the short-term.
- Measure risk against time, quality, and money
Consider if the financial risk you’re contemplating fits within the schedule of your current projects. Ask yourself: Is it within your financial constraints? Is the risk consistent with the objectives of your brand? Overall, it will be simpler to go ahead if you meticulously review, evaluate and confirm your decision based on the information and data available to you.
Scout’s Motto: Be Prepared!
Being ready for any issues that may arise when opening a new business can help your firm stay resilient and achieve its mission and vision. Knowing that managing financial risk is an integral part of every business operations, regardless of industry, it’s only fitting to seek professional advice and outsource such a service.
CloudCfo, a cloud accounting firm for startups and small and medium-sized enterprises (SMEs) in the Philippines, can help sort out your financial risk management needs and help you to grow your business! Contact us now to learn more about our offerings and how we can assist you in building and scaling your finance function.