Risks: does your business have immunity? Financial risks (V)

Rolandas Mištautas, Head of Law Firm KONSUS LEGAL

One of the most common reasons why businesses run into financial difficulties or become insolvent is unreasonable expectations.

Planning your future income is not only useful but also enjoyable. It is rational and wise to anticipate, plan, and calculate as carefully as possible future expenses.

By contrast, the debt sector often receives less attention, and unnecessarily so. This financial risk to the business can be linked to the load of credit granted to your customers or to the debt held by the company itself.

Small and medium-sized enterprises are particularly vulnerable, for example due to a lack of capital or human resources. Sufficient resources to ensure the success of the business would often help to ensure that, when a company suffers losses, these losses are covered, the prospect of business continuity is protected and, in many cases, bankruptcy is even avoided.

It is a fact that every company, whether large or small, strives to be profitable. However, where a large company is helped by its own weight or the scale of its activities, SMEs are best placed to compensate for these differences by being careful.

In particular, in a market economy, companies can only make a profit by taking constant risks. Risk is inherent in business because, especially in times of economic volatility, one situation may be one thing today and a completely different one tomorrow. And what has seemed stable and balanced up to now can change in an extremely short period of time.

Therefore, in order to manage potential financial risks, it is useful and necessary to plan not only your company's income and expenses, but also your debts, whether they are debits or credits. Keep a close watch on existing trends and any changes in them. React immediately if you spot a potential risk, whether it is related to supply chains or the solvency of existing customers. It is also advisable to carry out not only a balance sheet test, but also a debt liquidation test.

Most businesses face financial risks: market, credit (e.g. counterparty), liquidity, and the challenge of managing cash resources in the most efficient and reliable way.

It is essential that businesses devote sufficient attention and effort to both the formulation and successful implementation of effective financial risk management policies. It must be consistent with the principles and limits (if any) laid down in laws and regulations.

And it is up to business representatives, leaders and managers to make appropriate individual decisions on a well-defined, specific financial risk management policy and the level of risk tolerance - taking into account the specifics of their company's activities and interests.

Updated: 2023-03-31


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