Table of Contents
- 1 NetSuite Financial Management Software for Minimizing Financial Risks
- 2 Financial Risks for Companies
- 3 Ways to Mitigate Financial Risk
- 4 Why choose inoday way to Recession-Proof Your Business via NetSuite Financial Management Software?
For the most part, financial risks turn unavoidable, however, considered as a necessary condition to achieve a desired ROI and other business objectives. Even businesses with the most strategic, thoughtful, and decisive leaders encounter risks beyond their control. For instance, it can be a macroeconomic shifts or political unrest driving risks to financial management and sometimes making it critical to identify and prepare for the more foreseeable risks.
To minimize financial risks outlined below, businesses can leverage the core capabilities of NetSuite Financial Management Software. This inventively orchestrated ERP solution helps manage financial risks—right from planning to monitoring.
Moreover, NetSuite Financial Management Solutions helps with Financial Statement Audit and comes with financial, headcount and operational data, which is essential for risk management planning. Your finance team can make the most of its intuitive and interactive dashboards, alerts and real-time visibility to monitor risk metrics for early intervention. Additionally, your team will have access controls and an automated workflow to consolidate internal controls for accurate data and reduced risk of fraud.
Financial risks are termed as situations leading to an adverse commercial impact on the business, such as reduced profitability, capital loss, and plausible business closure. Above all, undesirable outcomes can be especially concerning when you consider the significant number and variety of financial risks. This is Financial Risk Management comes into the picture. It is a preventative approach and a combination of identifying, monitoring, controlling and planning to mitigate financial risks.
- Vigilance covers establishing and monitoring internal and external indicators that raise or lower risk.
- Preparation covers developing strategies to avoid or lessen risks that carry the potential for losses.
Although Extending credit to customers is a standard practice and a useful way to expand a business’s customer base and increase revenue, introduces a higher potential for uncollected sales. When customers do not pay, the seller’s business loses revenue and has unrecouped costs for delivery of products or services.
Market risks can be external forces endemic to a company’s specific industry, such as evolving customer preferences, technology enhancements, and other disruptors requiring businesses to adapt to survive.
For example, evolution in the recorded music industry from vinyl albums, to cassettes, to CDs, to digital streaming—required the industry to adapt for survival. Moreover, market risks are out of management’s control quite often.
Business tactics by existing competitors to sell comparable goods or services upset other business’s sales and cash inflows. It can be done by changing prices, product features or distribution strategies. Additionally, emergence of new players attracting the same customers’ attention and budgets in different ways is another risk.
For example, entertainment streaming services on various platforms introduced competitive risk to movie theaters.
The ability to pay its current obligations using short-term assets, such as cash, accounts receivable and short-term investments is termed as Liquidity. For the most part, it is a matter of timing as it ensures that cash flow or converting assets to cash is adequately done to make timely payments on debt.
You may experience higher liquidity risk when timing is out of synchronization or capital is locked up in long-term assets.
This financial risk refers to the potential imbalance between all cash inflows and outflows. It includes the ability or inability to pay immediate and medium- and long-term obligations constantly. Moreover, it is affected by systemic cash management policies quite often.
Although Business growth is a positive trend, companies should be aware of potential risks. This is because overextension of capital to invest in business expansion leads to liquidity issues.
Next, stress on operational infrastructure causes breakdowns in equipment, distribution interruptions, or workforce burnout. All these situations leave an adverse effect on fiscal growth of a company.
Furthermore, improper planning and forecasting can impact a business’s reputation or impair its product’s brand image. Eventually, it leads to long-term financial problems.
This financial risk refers to amount of borrowed capital a business uses to finance its operations or new investments becoming prohibitive or greater than the return on the underlying investment. Variables such as rising interest rates and lower-than-expected ROI increase leverage risk.
Due to interconnected global economy, businesses of all sizes encounter a level of global risk. Interestingly, it is not just reserved for large international conglomerates but impact small and medium-sized businesses equally.
Global risk covers changes in government policy, exchange rates, foreign country economies, social unrest, cybersecurity threats, public health, and many others. For instance, supply chain issues causing inability to purchase vehicles due to international chip shortages during the COVID-19 pandemic affected both enterprise level businesses and SMEs.
Business leaders need accurate information to make well-informed decisions and identify and monitor business risks as well. Errors in any of information elevate the chances of sub-par decision-making and financial loss.
Fraud is a real risk refering to potential for theft, cybersecurity breaches that can come from both internal and external sources. This financial risk leads to direct financial loss, such as revenue skimming and asset loss. Also, it can raise other risks, such as reputation, compliance and legal risks with indirect financial outcomes.
Experts recommend four approaches to mitigate financial risks.
- Avoidance— Changing Course To Knock Down Factors Causing Risks
- Reduction— Managing Risks With Measures Minimizing Its Effects
- Transference—Sharing Risks With Other Partners or Parties
- Acceptance— Moving Forward By Accepting The Risk Rather Avoiding It
Businesses can be in a better position to ensure financial risk management by identifying and monitoring risks. Then, they can choose a particular approach as per the type of financial risk involved or combine multiple approaches to address a risk more effectively.
The right financial technology bolsters other tactics for mitigating financial risk. Robust technology, such as cloud-based accounting software, NetSuite Financial Management Software, and integrated ERP systems, is essential for identifying and analyzing trends that often turn into financial risks. For the most part, NetSuite Financial Risk Management and Financial Reporting technology helps plan and develop metrics to reduce the potential for manual errors in record-keeping.
Insurance helps transfer some financial risk to a third party and preserves company capital when paying for an unexpected loss. However, insurance policies carry premium costs. Although the proceeds of a claim can help finance recovery, they do not eliminate the risk or the disruption.
Reserving emergency funds can prepare for the financial risks impact and help minimize financial losses ensuring business continuity. Businesses can internally generate emergency funds through positive cash flow or they can be in the form of an accessible line of credit.
Strong Quality Assurance measures ensure that products and services meet desired quality standards and reduce product-related financial risks. You can opt for Checklists, checkpoints, sampling and supervision throughout the production process to ascertain ensure better business outcomes.
Diversifying investments between equity and debt helps reduce volatility and risk. Also, if you diversify your business’s income streams, where you are not relying on a small number of products or customers, you can easily minimize financial risk and loss.
Uncollected Account Receivables leads to revenue loss, reduced cash flow and lost profits. Hence, businesses should stay on top of the balances by using an Account Receivable aging financial reporting, which tracks the payment status of a company’s Account Receivable, or other similar tools.
Documenting agreements assists in reducing the chances of financial loss, especially when it comes to analyzing the finer details of an arrangement. Misunderstandigs among business partners often cause all sorts of issues leading to financial loss.
Business leaders can manage leverage risk by keeping loan balances as low as possible to avoid excess borrowing costs. These can be interest charges, bank fees, and heavy cash flow draining from inflated loan payments. Additionally, lower outstanding loan balances maximizes a company’s available credit for emergencies and unforeseen challenges.
We know that smart CFOs work with a plan for businesses resilience and be future-ready for any kind of business circumstance. As #1 ORACLE NetSuite Channel Partner and globally acclaimed for driving Digital Transformation via Cloud Computing Solutions, inoday understands, monitors, and deploys the best-suited solution to mitigate financial risks. CFOs and their companies can make the most of our expertise in solving critical business issues, reducing financial risks via adaptive solutions, and delivering high-quality support planning.