Financial risk management basically refers to the act of managing risks in such a way that a company or business has a minimum liability towards loss. This would mean that losses would occur on a minimal level and profits can be expected at a more frequent rate.
Evaluation of risks associated with business is a must for all financial institutions. This especially refers to banks that have to make sure that the business or company they’re investing in will bring back their invested money along with interests. Businesses that are unable to return their loans on time affect the bank’s credit rating directly warding off possible future investments by outside companies.
A bank needs to keep its investors and borrowers in line keeping the flow of cash regulated. Otherwise if there are times of financial crises in the economy and people would want to take out their investments, the bank will not be able to pay up leaving every one of its associates in distress.
Risks surrounding the markets on a national and international level also have a considerable impact the policies of financial risk management set by a company or a business. The circling of goods or commodities on prices assigned by the market makes a direct impact on the sellers’ profits and losses.
Currency risks are also associated with the international market as countries trading with their own currencies are more liable to the global monetary value drifts. Therefore, some countries prefer to trade upon gold as its value is less likely to change quickly on global scale.
Every company or business is bound to go through audits if they are not careful in managing the flow of income and savings earned. Audit risk of a company or business is determined by the multiplication of inherent risk, control risk and detection risk. Hence, audit risk = IRxCRxDR.