What is meant by financial risk management?

Financial risk management is the process of evaluating and managing current and possible financial risk to reduce an organization's exposure to risk.

Financial risk management

strategies are an action plan or policies that are designed to address various forms of financial risk. Strategies are important for any company or individual to manage the financial risks inherent to operations in the economy and the financial system. Financial risk management is the process of understanding and managing the financial risks that your company might face now or in the future.

In this case, market risks that translate into unique risks for the company are usually the best candidates for financial risk management. However, in terms of financial risk management, operational risks can be managed within acceptable levels of risk tolerance. Operational risk, as defined in the Basel II framework, is the risk of indirect or direct losses caused by failed or inadequate people, systems, processes, or internal external events. Operational risk is a general term that encompasses all other risks that a company may face in its daily operations.

It all comes down to the nature of the risk and the individual or company's current risk appetite. Financial risk management is the process of identifying risks, analyzing them and making investment decisions based on accepting or mitigating them. Banks and other wholesale institutions face a variety of financial risks when conducting their businesses, and the way in which these risks are managed and understood is a key factor in profitability, as well as the amount of capital they must hold. As for risk management in general, managing financial risk requires identifying its sources, measuring them and the plans to address them.

Staff turnover, thefts, fraud, lawsuits, unrealistic financial projections, poor budgets and inaccurate marketing plans can pose a risk to your results if not anticipated and managed correctly. In this sense, it is up to the owner of the company and the company's directors to identify and evaluate the risk and decide how the company will manage them. There are several risk management strategies available to individuals as well as to businesses and financial institutions. To address these issues, more sophisticated approaches have been developed in recent times, both to define risk and to optimization itself; risk parity (tail), for example, focuses on the allocation of risk, rather than on the allocation of capital; see postmodern portfolio theory and financial economics § Portfolio theory.

For small businesses, it's not practical to have a formal risk management function, but they tend to apply the above practices, at least the first set, informally, as part of the financial management function; see Financial Analyst § Corporate and others.