Managing your business’s investment risk is integral to being a successful entrepreneur or business owner. Although it’s impossible to predict the future, you can take steps to manage your business’s financial risks effectively with the guidance of a financial advisor in the D.C. area.
When handling business investment risk, most people don’t know where they stand or what to do next. Use this guide to craft a 5-star business plan!
Knowing how to navigate these seven types of business investment risk can help successful entrepreneurs like you stay on top of their game:
- Interest Rate Risk
- Inflation Risk
- Currency Risk
- Liquidity Risk
- Company Risk
- Credit Risk
- Market Risk
At Brown | Miller, we have a CERTIFIED FINANCIAL PLANNERTM in D.C. to help you navigate the many options available and support you toward an effective strategy that’s right for your situation.
1. Interest Rate Risk
The first thing to understand about interest rate risk is that it’s not inherently good or bad. It’s important to remember that interest rates can go up or down, so there are two ways of looking at this type of risk:
- Higher interest rates mean higher payments if your business borrows money over a long period. If your company has borrowed money at 5% and now the market rate is 6%, you’ll have to pay an additional 1% on top of each new payment—a cost-driver for your business mode.
On the flip side, if you’re paying off debt with low interest rates (like 4%) and now find yourself with access to loans at 3%, then your cost-drivers will be reduced by 1%. This could make a big difference in cash flow management—so it pays off in the long run.
- Interest rates also impact how much capital is available for investment into growth opportunities like new equipment or hiring employees.
2. Inflation Risk
Inflation risk is the risk that the price of goods and services will rise over time. It’s one of the most common types of investment risks, and it affects all investments. You can manage inflation risk with a diversified portfolio that includes assets that are less sensitive to inflation.
For example, you could invest in stocks or bonds that pay interest rates higher than your local market average. If you’re concerned about inflation, consider investing in assets that offer protection from rising prices. A fee-only financial advisor in the D.C. area who acts as a fiduciary can guide you through these decisions with your best interest in mind.
3. Currency Risk
Currency risk is the risk that the value of your investment will change due to fluctuations in the exchange rate between two currencies. This can affect all businesses that have international operations or transactions. The idea is that if you have money in one currency and someone owes you money in another currency, there’s going to be some exchange rate risk between those two currencies. That can lead to a significant impact on your bottom line if it happens at just the wrong time.
One way to manage this type of risk is by hedging against movements with derivatives such as futures contracts or forward contracts so that you lock in an exchange rate today for delivery tomorrow (or vice versa).
4. Company Risk
Business owners must manage their employees, keep up with the latest technology trends, and ensure they serve their customers well. But there’s one thing that can be easy to forget.
Company risk is simply the possibility of a financial loss due to something beyond your control—like a natural disaster or an economic downturn. You can put processes in place to help you avoid these kinds of losses, but it’s not always possible. That’s why business owners need to understand what the risks are in their industry and how they can manage them.
If you’re concerned about your company’s risk, talk with a financial advisor in Washington D.C. with years of experience working with business owners and entrepreneurs. At Brown | Miller, we will be able to help you identify potential problems before they become serious issues.
5. Liquidity Risk
Liquidity risk is the risk that a business will not have the needed cash required to meet financial obligations quickly enough. Without solid liquidity risk management and careful cash flow management, your company may fall subject to a liquidity crisis which can be insolvent. This happens when an asset becomes illiquid, meaning it cannot be sold quickly or easily.
In addition to understanding the securities of individual companies and how those companies fit into a diversified portfolio based on their volatility and correlation with other assets, it’s crucial to understand how liquid their investments are. You must also know whether those investments will likely remain liquid in light of changing market conditions and regulatory changes.
6. Credit Risk
Credit risk is the likelihood that a company will not meet its financial obligations. This can include a company being unable to pay back its debts, or it can include a company paying back its debts at a later date than expected. Credit risk for businesses must be managed carefully to maintain good business relationships and avoid bankruptcy.
Along with liquidity risk mentioned above, there are also two other types of credit risk for businesses:
- Default Risk: When a company defaults on its debt obligations, it has failed to meet its obligations in time. This could be due to a lack of funds or other factors like poor management decisions or financial difficulties within the company.
- Operational Risk: This refers to any risks associated with how well an organization operates day-to-day activities such as product delivery times or customer service levels.
7. Market Risk
Market risk is the risk that a company’s earnings will be affected by changes in the overall economy. This can be due to either overall economic growth, decline, or changes in what products are sold. Companies with high market risk should consider hedging their investments to protect themselves against potential losses.
The most common way market risk affects a business is through currency fluctuations and interest rate changes. If the dollar value goes down, U.S. companies selling products overseas will have to lower their prices to stay competitive.
Another way market risk affects businesses is when interest rates change. If you borrow money to start your business and interest rates go up (which they tend to), you’ll pay more to service that debt.
Get help from a financial advisor in the D.C. area at Brown | Miller
As a small business owner needing help managing your company’s risks, consider hiring a financial advisor in Washington, D.C. A qualified professional can guide your financial moves to mitigate any risk to your company’s finances.
A wealth management firm in D.C. will also be able to understand how financial decisions affect your business’ health as a whole.
This is especially important if the decisions are connected with other aspects of running a business (like operations). If a decision causes problems in one area but helps another, a savvy outsider can offer objective suggestions based on their expertise and experience.
By managing the above areas alongside your cash flow, while keeping an eye on the big picture, you can aspire to reach your financial goals with confidence. A financial advisor in Washington D.C. can serve as your accountability partner and economic ally.
Taking these steps can help you manage your business’ financial risks effectively.
We hope this has given you a good overview of the different types of risk that you face as a business owner. Managing them is crucial for your company’s long-term success. We encourage you to take steps to protect yourself and your company from financial problems now and down the road–contact our team for support!