What distinguishes financial risk identification from other types of risk identification?

Identifying financial risk is like playing financial whack-a-mole: every time the market throws a curveball, another risk pops up! You have to juggle spreadsheets, scan news like a hawk, and predict the future like a slightly anxious psychic. Unlike finding rogue socks under the couch, it's not as simple as flipping on a light. And unlike spotting your crush from afar (social risk), you can't rely on sweaty palms and butterflies in your stomach (though those might appear after a bad investment!) So buckle up, because identifying financial risk is a financial rollercoaster, minus the popcorn and fun music. Remember, it's not about spotting danger, it's about predicting the next fiscal free-fall before your portfolio takes a nosedive!

Business enterprise is run for Profit and profit is best understood by cash inflow rather than book profit. Hence, safeguarding cash flow by apt financial risk management is priority for all CXOs. In case of philanthropic enterprise (not for profit) also, every ₹ / $ saved will be available for more services to the society. Hence, for such enterprises also, effective financial risk management is must.

1- Quantitative Analysis: It's heavily based on numerical data and financial modeling. 2- Market Focus: Involves evaluating market volatility, interest rates, and economic trends. 3- Liquidity Evaluation: Assessing risks related to cash flow. 4- Credit Risk Assessment: Analyzing the potential for debtor default. 5- Investment Portfolio Risks: Focused on risks within investment portfolios. 6- Regulatory Impact: Considering financial regulation changes. 7- Financial Instruments: Managing risks associated with financial products. 8- Currency Fluctuations: Addressing risks from exchange rate changes.

Specifics of interest rates movement, international taxation, economic investment activities, inflation etc are complex issues impacting flow of money and require special risk treatment. Additionally, financial risk has to be assessed by converting impact of any risks in financially quantifiable and measurable manner. For e.g. vendor dependence risk or risk of constrained supply of key material risks have financial implications. Alternative vendor arrangements would be primary risk response, but identification of more working capital requirements for unpredictable material price increases is business acumen of the financial risk manager. Thus, financial risk management requires looking beyond first obvious risk response.

Financial risk identification is different from other types of risk identification in several ways. One way is that financial risk identification requires a high level of quantitative and analytical skills, as well as a deep understanding of the financial markets, instruments, models, and regulations.

Simple steps to identify financial risks are: 1 Understand nuances of business by dissecting it into various functions and activities. Business Plan, Strategies, Business Model Canvas are some of the tools that help in starting from macro level to understand business environment that attracts or addresses various financial risks, like capital structure, borrowed funds, investments in plant and machinery etc. Studying business operations and technology employed helps understand micro level nuances that attracts or address various financial risks like periodic cash flows required. 2 For each macro and micro business activity, ask questions: what, where, how, when, why, who - can go wrong? That’s it, financial risk matrix is ready.

Complex local and global business environment generates financial risks from vast number of sources. For example, Inability in early identification of cash flow drain from real estate sector of China has resulted in huge funds locking and economic downturn that impacted other businesses also. Similarly, offering incentives to manufacturers in India has boosted not only Indian economy but has also given global companies an opportunity to improve financial results (profitability) by starting production in India. Measuring and quantifying financial risks is challenging for all scenarios like global economic activities, war, technology changes and the latest, environmental threats like pandemic, that have serious financial consequences.