Money
Issue No. 36 - August/September 2007
Making financial risks pay
by Pamela Brombal
Financial risk exists in most businesses and can significantly affect an entities profit, yet in my experience, few proprietors, CEO's or board members are even aware the risk exists. Too often, businesses start exporting or importing, borrow money or buy raw materials, without considering the impact of price movements in these markets on their bottom line. Most concerning, is that if you don't understand this risk and know how to manage it, you could lose all your profit, or even worse, you could lose your business.
My name is Jordan Spencer and for the last 15 years, I have been working in the financial markets here in SA and in Sydney. I have also worked both for Banks as an advisor and for companies as a treasurer and strategist. In my time, the biggest mistake I see businesses make, is not understanding their financial risk. With that in mind, 'in-business' has asked me to present a series of articles on financial risk and how to deal with it. This issue, I would like to explain exactly what financial risk is and where the risks exist in your business.
Let's start with a definition. Financial risk is the risk of a price movement in a market that you have exposure too, but have no control over that pricing. A simple example is that of a borrower. You borrow some money to fund a project, that project is profitable when you enter in to it given the interest rates of the day, but during the life of the project, interest rates rise and fairly quickly your project becomes unprofitable. Now whilst this is a very simplistic scenario, let's break it down a little and see what went wrong. You entered into a project, you did your analysis and worked out you had the skills and contacts to make it work. However, during the life of the project, the interest rate movement, something which you have no control over, chewed up your profit. Another classic example has been brought home to many businesses on the back of the strengthening Aussie dol...
