Building a Strong Financial Risk Management Plan

Risk management isn’t just another workplace buzzword or cliché, it’s a business imperative. There are many types of risk that a business is exposed to, and each have their own consequences if left unaddressed or mismanaged.

Financial risk management is no exception, and can be the determining factor of a business’ very existence. At its core, financial risk management is about identifying and addressing risks tied to financial operations, like liquidity, credit, market fluctuations, and investments. It also requires assessing financial losses or potential circumstances that could stunt a business’s growth or shut down operations all together.

Let’s explore how to build and apply a robust financial risk management plan, and why partnering with a business operations service provider can help you reach your business goals while mitigating unnecessary financial risks.

Why Managing Your Financial Risk Matters

Financial risks can be obstacles to business growth since they can disrupt operational procedures, create financial pressures, and expose organizations to legal issues. But when conducted properly, financial risk management enables a business to build momentum and catalyze success.

For small and medium-sized businesses, the margins for error are even more slim, and there is more at stake. So having financial risk management at the top of your priority list is not a nice-to-have, but a must-have.

Creating a Strong Financial Risk Management Plan

First thing’s first: successful risk management can’t be achieved without a solid blueprint in place. A strategy must be created, then adhered to and re-assessed on a regular basis to ensure the business is best positioned for growth. Establishing best practices will also help your strategy to scale alongside your business. Remember, clarity wins: it’s best to avoid creating a plan that’s overly complex or one that may not suit your business’s size or culture.

1. Identify financial risks: Small and medium-sized businesses should consider market, interest rate, regulatory and legal, and credit risks, among others, when creating a risk management plan. Methods to measure risk and quantify potential loss include auditing each area of the business (i.e. payroll, HR, and legal), and working with a back-office solutions provider to help review and assess the business’s operative and administrative wheels.
2. Assess and prioritize: Next, business owners should prioritize each risk by its likelihood and potential impact. For example, payroll budgeting and administration might take precedence over other areas of the business, whereas cash flow might be a priority area to monitor for others. Because small and medium-sized businesses have limited resources compared to larger organizations, prioritization is even more important.
3. Create a plan: Once you have a solid understanding of what risks are posed and which ones should be prioritized, you’re now ready to develop financial risk management strategies that best fit your organization. Strategies can look like:
1. Creating crisis management plans to ensure there’s a roadmap to follow in times of emergency.
2. Stress test implementation to better understand what the business is able to handle, how it operates under times of stress, and what areas need to be strengthened.
3. Investment in robust insurance coverage to protect against claims, damage, and loss.
4. Monitor and report: As with all other risk management plans in business, financial risk management doesn’t fit the bill of “set it and forget it.” It’s an ongoing process that requires identifying key performance indicators (KPIs), tracking deviations, revising forecasts where and when necessary, and holding regular reviews. Continuous monitoring turns risk management from a chore into a performance driver.
5. Create a risk-aware culture: Assign clear ownership of financial risk management, even on small teams, to ensure nothing falls through the cracks. This can be done through establishing policies and training teams in budget discipline.

How Back-Office Outsourcing Can Help Mitigate Financial Risk

We understand how time-consuming and daunting managing risk can be, especially since financial risks can put a business on the line with one wrong move or one overlooked area.

That’s why having a back-office solutions provider is game changing. With back-office outsourcing, leaders can place their time and energy on running the business with confidence, knowing that their solutions provider is there to take on the administrative burdens and workloads, all from behind the scenes.

At ESSG, we’ve made it our mission to do just that. We take on risk management so that you can do what you do best: growing your business. We’ve helped many organizations manage and reduce risk, and we’d love to do the same for you.

Ready to strengthen your financial risk management? Reach out to us today to learn how we can be your trusted partner and advisor.