One of the central goals of business finance analysis is determining what a company's risks are so it can properly manage them. Working with a business finance consultant is a good way to get an independent perspective on your risk management. One can assist you in these four ways.
Spotting Risks
Every business has a degree of risk exposure. That is a good thing because the return on the risk premium is often a source of profit when a company's investments pay off. However, the business has to survive long enough to see those returns.
Here is where risk management enters the picture. For example, a business finance analysis for a property management firm might show that it has risk exposure to changing interest rates. If the company grew up in the zero-interest-rate world of the 2010s, the team might not have the necessary experience dealing with today's higher interest rates. The company may need to manage its debts and refinance loans wisely to ensure that it doesn't get stuck with excess servicing costs.
Risk Probability and Impact
A company also needs to think about the probability that any particular risk will blow up. Suppose a pharmaceutical firm depends on overseas supply chains for most of its inputs. The company has risk exposure due to everything from cyclones to wars. A business finance consultant can help the firm quantify the odds of those disruptions and how badly they'll affect its operations.
Mitigating Risks
Risk management often requires some creativity. A furniture manufacturer will often depend on lumber as one of its major inputs, for example. Consequently, it has exposure to fluctuations in lumber prices. Using supplier contracts, the company might elect to lock in its costs for several years going forward.
It also could buy out-of-the-money commodities options to guard against supply shocks. Essentially, the options are cheap insurance if the price goes up and expire worthless if the risk passes. In some cases, it could keep rolling the options forward every 90 days to effectively act as an ongoing insurance policy against lumber price spikes.
Monitoring
Finally, a company needs monitoring to see how its business finance analysis is performing and whether it might require adjustments. A business finance consultant can compile the analysis into reports. They can then sit down with decision-makers to review how different projected risks evolved in the real world and how well the mitigation strategies worked.
For more information, contact a business finance consultant near you.
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