Credit Risk Financial Risk Assessment Risk Management
4 mins read

Managing financial risk – What is it and how does it work? 

What is financial risk? 

The term ‘risk’ refers to the probability of an adverse outcome occurring. The higher that probability, the riskier the activity. ‘Financial risk’ applies that concept to a potential loss of income or revenue for a business or individual.  

Many decisions inherently contain financial risk. For example, when a company or individual buys shares in any company, there is a chance that it may go insolvent. This outcome represents a financial risk, as investors may have to sell at a lower price than they bought – representing a loss.  

What is financial risk management? 

Some higher-risk opportunities can also net higher returns. If you invest in a high-risk company that makes good on its products and promises, the upside might be significant. Financial risk management refers to the practice of balancing these two extremes. The aspiration is to allow for enough risk to secure high returns without jeopardising the operation.  

Companies and high-net-worth individuals put substantial resources into due diligence, investment strategies and identity verification to mitigate different types of financial risk. They do so because it gives them a better sense of who to trust. Research is imperative to managing financial risk exposure. The more you know about those you’re dealing with, the better.  

What is a financial risk assessment?  

Savvy businesses conduct a financial risk assessment prior to making decisions as part of their financial risk management strategies. They do so by leveraging tools such as the Financial Risk Assessment from CreditorWatch, which deep dives into two to three years of cash flow, income statements, balance sheets and more. A Financial Risk Assessment helps to uncover the financial viability of your customers, suppliers or contractors. 

The due diligence required increases in line with the value or volume of a trading relationship. High-value or high-volume trading partners must be more comprehensively assessed for financial risk, as their insolvency may threaten your company’s survival.  

What is a financial risk manager, and what is a financial risk analyst? 

Some businesses may employ a full-time financial risk manager, and one or more analysts, to assess the risk exposure relating to certain decisions. Large institutions, such as banks, often have substantial in-house teams devoted to risk assessment and due diligence, as the money involved can be significant and the stakes are high.   

How to manage financial risk 

For Australian businesses, consider the following points for managing financial risk. For more specific advice, consult with your own Chartered Accountant (CA), Certified Practising Accountant (CPA), or trusted financial advisor.  

  • Verify who you’re working with 

Several businesses must report on customer identities and any Ultimate Beneficial Owners (UBO) to comply with Know Your Customer (KYC) obligations. The UBO report from CreditorWatch scans ASIC reports and calculates ownership percentages to streamline this process, delivering a simple, downloadable PDF report.  

Even companies that aren’t required to report under AML/CTF legislation should always verify entities they deal with to the best of their ability. Companies or individuals that obscure their identity or beneficial owners may not be worth trusting. ApplyEasy, powered by CreditorWatch, verifies the details of every online credit application to your business to ensure that nothing slips through the cracks.  

  • Consider your insurance options 

Mitigating financial risk also involves protecting the assets that your business already has. Insurance can play a vital role in this regard. Consider insuring any equipment or business capital you cannot afford to replace if it gets broken, stolen or lost. Speak to a trusted insurance broker to determine the options that suit your business.   

  • Diversify your clients 

Over-reliance on one client can spell trouble, especially if they fall behind on payments. You should prioritise widening your client base to safeguard your revenue stream. Meanwhile, automatically monitor the payment behaviour of your current aged trial balance using DebtorLogic from CreditorWatch to identify deteriorating debtors as soon as possible. Time is of the essence, and our 24/7 monitoring and alerts tool can allow you the time to take action.  

  • Check creditworthiness using RiskScore  

Credit-checking trading partners is an essential step in the financial risk management process. You need to know who is likely to repay and who isn’t. Our sophisticated machine-learning RiskScore platform analyses over 11 million monthly tradelines from 55,000+ customers to deliver a score from 0-850. The higher the score, the safer the trading partner. All that you need to get started is their ABN or ACN.  

  • Conduct an in-depth analysis of high-value or high-volume trading partners 

As mentioned, depending on one client for the majority of your revenue can be a risky game. The comprehensive Financial Risk Analysis from CreditorWatch is essential to deep-dive into these trading partners and reveal any unknown information. The report, accompanied by analysis from a qualified CA or CPA, analyses two to three years of financials, including cash flow, income statements, ASIC events and court actions, to deliver a complete picture of the business you’re relying on.  

Manage financial risk with the suite of tools from CreditorWatch 

Our expert team is on hand to help guide your business through selecting and implementing the best mix of tools and resources to mitigate financial risk for your business. Protect your vital cash flow at every stage, from the credit application process to collecting money locked in Accounts Receivables. What’s more – you can ensure the fit is right for you by taking advantage of our free trial offers. 

To learn more, and safeguard your vital cash flow, speak to our expert team today

credit credit risk credit risk management finance financial risk assessment risk risk insights risk management
Michael Pollack
Head of Media & Communications
Michael joined CreditorWatch in July 2021. He has more than 20 years’ experience in business journalism, marketing and communications strategy and digital content development. He is passionate about communicating to the business community how CreditorWatch’s product suite can help them grow and protect their companies.
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