Financial Management Vs Financial Risk Management: Understanding the Differences

 

What is Financial Management?

Financial management entails the process of planning, organizing, directing, and controlling the financial activities of an organization. These include the procurement and utilization of funds for the enterprise. It means applying general management principles to the financial resources of the organization. Financial management is a critical topic in business because companies cannot function without the proper use of funds. To understand and apply the right financial management practices in handling and use of funds, one has to have either a professional degree or online financial management certification.  

The Objectives of Financial Management:

 

  • Profit Maximization

One of the main reasons an organization employs a financial manager is to maximize the profits whilst managing the finances of the company. The gain can be short-term or long-term. But, the main focus is the financial manager or department handling the financial issues of the organization must ensure that the organization in question is earning sufficient profit.  

  • Proper Mobilization of Finance

The collection of funds required to run the business is also a critical part of financial management that the manager needs to handle appropriately. Once the finance manager concludes the estimation of the amount required for a business process, the required amount can then be procured from a legal source such as debenture, shares or even request for a bank loan. But, the point is that the balance between the money the firm has and the amount borrowed should be maintained.   Also Read: Embarking on a Successful Career in Finance  

What is Financial Risk Management?

Financial risk management is nothing but identifying the potential pitfalls called risks, prioritizing them, and finding appropriate solutions to mitigate or eradicate these risks. Of the various types of risk your organization might face, financial risk has the most immediate impact on your cash flow and the bottom line. You can anticipate these risks and head them off at the pass with the help of an online financial management certification. financial management online certification  

The Objectives of Financial Risk Management:

 

Identify Market Risk

Market risk is any risk concerned with the marketplace in which your business operates. Businesses that adapt to serve the online audience have a better chance of surviving than businesses who stick to the offline business models. Generally, every business runs the risk of being outpaced by competitors. If you don’t keep up with the latest consumer trends and pricing demands, then you are likely to lose the market share and thus result in lowering the profit ratio.  

Identify Credit Risk

Credit risk is the possibility that you are going to lose money because someone fails to perform according to the terms of a contract. For example, if you deliver certain goods or services to a customer on a 30-day payment term basis and the customer fails to make payment by the due date, then you have suffered a credit risk. Businesses must retain sufficient funds to cover their account payable or they are going to experience some serious cash flow problems.   Also Read: How to start a career in Financial Analytics in India?   The term risk is fraught with images of unforeseen crises that agitate your business, followed by a frantic response. This is bound to happen, but the truth is with proper financial management practices in place, the risk can be handled effectively. In reality, every aspect of the business has an element of risk and part of success is the ability to look forward, foresee prospective risks and consider how you can utilize your resources to deal with them.   It is highly imperative to have a risk management plan as part of your overall business strategy management plan in order to sustain and grow. There are several financial courses to help you incorporate risk management into practice:  

Think Ahead

Planning is very important. Right now it might be calm, but possible storms can erupt anytime. So try to identify the risks beforehand and plan how to respond. Allocate the right resources you might need to keep up with your strategy.  

Be Proactive

You should not be reactive and only be proactive. If you are reactive, you might not take the right measures in tandem with your goals.  

Conduct a SWOT Analysis

This is the first step towards identifying your risks by listing out your Strengths, Weaknesses, Opportunities and Threats. Have your leadership team analyze this for their specific area.  

Pest Analysis

There is also another analysis tool, which can help you identify potential risks. It is called PEST – Political, Economic, Social and Technological factors that can deter your business. Thinking about these things ahead of time will make you well prepared to face the problems. For instance, the government recently introduced the GST bill. If you have made this analysis, this would have come under the political domain and you could have been ready with the right measures to cope with this change.  

Prepare your Response

For each risk, consider the course of action you can take and the number of resources that you are willing to commit towards the same. In some cases you might think your company is strong enough to handle it, that’s great! At times risk will fall right in the middle – it cannot be avoided or accepted. So there your strategy should be to alleviate its impact.  

Be Regular

Risk management strategies should not be undertaken just for once, it should be continuous. Rely on multiple sources to stay updated of all the trends with an eye to spot risks. As a leader, you should focus on this continuously.  

Maintain a Long-term Outlook

Remember the path is long. Keep moving forward and don’t let risks disturb you. Even if unforeseen events happen, accept it as it is and move forward. Always think long-term and take the right measures. Make financial risk management as the top priority for your business and remove any hurdles that come along your path. Become an expert with finance courses to identify risks and mitigate them. Enrol into IIM Kashipur’s Applied Financial Risk Management course to master this domain in finance.   More Information: Executive Development Program In Financial Analytics from XLRI Jamshedpur Professional Certificate Program In Applied Financial Risk Management from IIM Kozhikode Executive Development Program In Advanced Financial Management from XLRI Jamshedpur

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