How to Handle Financial Risks: Tips From Experts

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Over 40% of Canadians face financial difficulties, and it’s not only due to the pandemic. It’s also because they’re exposed to many risks that significantly affect their financial stability. In this article, Kevin N. Cochran, an expert in adult lifestyle management, compiled various financial risks you should look out for and how you can handle them.

What Are Financial Risks?

A financial risk is any possibility of losing money for expenses. It significantly affects your cash flow and hinders the accomplishment of financial obligations. Such risks come in various forms and sizes and can affect anyone. Generally, you can encounter two primary categories of risks: one that threatens your business and one that affects your personal life.

Financial Risks in Businesses

Here are some reasons why a business can be prone to these risks:

  • Too much debt
  • Abrupt or unfavourable changes in exchange and interest rates
  • Poor decision-making
  • Changing market environment
  • Extremely vulnerable investments or transactions
  • Poor management

You and your business can become a target to four major financial risks:

1.    Market Risk

Economic uncertainties, such as sudden price changes in liabilities and assets, expose businesses to market risks. Moreover, this kind of risk can also be due to the continuously changing market environment. For example, nowadays, customers tend to shop online rather than make purchases at traditional and physical retail businesses.

2.    Liquidity Risk

This directly pertains to the danger of a company being unable to meet financial obligations. This risk involves the inability to immediately convert certain assets into cash when it’s suddenly needed. A liquidity risk might arise when there’s an insufficient number of buyers.

3.    Credit Risk

This is a risk caused by extending credit or money to clients and them not paying, or when the business made credit with suppliers and could not fulfill their part of the agreement. These activities can disrupt your business’ cash flow, reduce funds, and affect potential profit.

4.    Operational Risk

This is a risk due to a business’ operational failures in ordinary business activities. This can be incurred from poor model plan and application, frauds, mismanagement, and technical issues. A poor model plan means that the marketing and growth plans of the company are inaccurate and inadequate.

Personal Financial Risks

Any Canadian is also prone to personal risks. To properly handle your financial plans and management, you have to know what risks hinder you from meeting your obligations. Below are four major types of personal financial risks you have to look out for:

1.    Expense Risk

This is incurred due to various reasons:

  • A lack of income to meet your needs
  • Spending more than you earn
  • Emergencies that force you to spend

In Canada, one of the common factors is gambling; playing at a casino is a risk. Countless games, especially online slots, can be addictive. Even if you play games at the best online casino canada, the chance of you losing more money than you intend to is higher compared to gaining earnings in casinos.

Because of this, the Canadian Centre on Substance Use and Addiction (CCSA) had to provide guidelines to manage this risk and moderate gambling.

2.    Credit Risk

This is a risk involved in situations where you borrow money. You can incur personal credit risk from:

  • Bad credit
  • Bad and high debt
  • Spending too much on expenses related to debts such as interest rates, additional charges, etc.

3.    Income Risk

This is highly dependent on your capability of earning income. So, if you’re not capable, this may be due to reasons like:

  • Unemployment
  • A sudden job loss
  • Living through income from volatile assets
  • A disability that makes it impossible to get a job

4.    Asset Risk

This is significantly triggered by any issues with your assets, including your investments. You’re prone to asset risks when there’s:

  • Damage to your assets (properties, etc.)
  • Inflation
  • Poor returns on investments
  • A terrible investment portfolio
  • Poor investment management

Tips On Financial Risks Management

According to the Financial Consumer Agency of Canada, the stress incurred from these financial risks and difficulties has significant impacts on many Canadians’ health. That’s why to avoid grave health impacts, here are some tips on how to manage risks based on experts:

  • Educate yourself about the risks and how you can possibly be exposed to them.
  • List all your business and your weak points in your financial capability.
  • Save enough money that you can use for the long run.
  • When tempted to take on financial risks, always look at the worst-case scenarios.
  • Separate your personal funds from your business funds.
  • Don’t impulsively invest.

You can be exposed to many financial risks, and the best way to handle and possibly avoid these is to know how to manage them appropriately.

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