In Nigeria, one of the few ways to be financially free and buoyant is to own a business. Owing a business might be easy when the capital and idea is readily available but sustaining this business is where many business man and woman fail mercilessly.
According to Small Business Administration, more than 50% of business especially businesses with less than 50 employees shut down in less 5-6 years period, and if we should further dig down into these numbers and statistics, more than 65-75 % of this business either declare bankruptcy, merge with another business or get bought by bigger competitors. We can see that it requires a lot of work not only to make your business stand out but to make it pass through its adolescent stage.
In Nigerian, one third of all the business own by the populace are small scale business which has less than 20 staffs. This article is targeted at these type of businesses in this article, I will explain 4 risks these businesses face with example and in my later articles I will explain how we can offset this risk and solve this problem and the proper way to best shield your businesses.
Before I can proceed, I believe it seem fit I first explain what is this financial risk we are talking about.
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What is financial risk?
Many entrepreneur do not have an in-depth knowledge about the term “Financial risk” and many think that this solely has to do with losing money in business. Though this may be correct, financial risk speak more than just losing money in any business, it comprises of the different type of risk different establishment faces, the company capital structure such as loans and financial transaction.
Financial risk is the probability that a business owner or investors in a business will lose money when the company’s cash flow is inadequate to either offset (repay) its debt or its financial transaction.
Most businesses are threaten by this financial risk, while some are at the verge of collapse, let us examine this various category or type of financial risk and how they affect various business on a day to day activities.
Types of financial risk business go though.
For the purpose of illustration and example, I will use a fictious character called Mr Chukudi Nwakolo, who is a business man that import mobile phones and it’s accessories from China.
Market risk cannot be avoided but can be hedged against. Market Risk is the probability of a business owner experiencing losses due to factors that affect the overall performance of the market.
This risk affect all types of business but its effects depends entirely upon the type of business or market, the market risk a bank might face will be different from the same risk a bottling company might also face.
Example: Mr Chukudi Nkwakolo is an importer of phones and phone accessories and he wish to import from China. Mr Chukudi will face series of Market Risk when he wants to pay for his goods from China because of the currency exchange rate between both countries. If the currency exchange rate is high Mr Nkwakolo will be forced to pay more, which will also in turn affect the way he will sell to his customers too, so we have seen how the market risk can affect his profit and wellbeing of his business altogether.
Mr Chukudi Nkwakolo can also hedge this risk by paying for his goods upfront (earlier) when the exchange range is in his favor and import it later. READ about futures to understand the more about this.
Every business faces this type of risk whether small, medium or large scale business. What is this risk? Credit risk is an inevitable risk that affect businesses when they lend out money to other businesses or individuals.
Many business lend out money to provide financial assistance but where this Credit Risk comes in, is in paying back the principal (loan) and interest.
Example if Mr Chukudi Nkwakolo decides to give out a loan of 1 million naira (₦ 1,000,000) with an interest rate of 3% per month to his friend Dr Okafor who owns a hotel and Dr Okafor agree to pay back in the next 3 months with the total sum of One Million, four hundred and fifty thousand naira (₦ 1,450,000) if Dr Okafor cannot pay back, this is a bad debt and a loss to Mr Chukudi
We can see that, this is a risk every business has to pass through because once in your business career you will be forced to help a friend or family member with a loan and you cannot detect who will default in the payment of that loan but this cannot be avoided by taking a collateral from the debtor with a written agreement which will state the terms and condition of such loan.
Legal Risk are faced mainly by medium and large scale enterprise and rarely by sole proprietorship or small scale business. This risk arises mainly by misunderstanding, poor communication, lack of policy and regulation, breach of contracts, etc.
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Legal risk was defined by Whalley M. 2016 as the risk of financial or reputational loss that can result from the lack of awareness or misunderstanding of ambiguity in or reckless indifference to, the way of law and regulation apply to your business, its relationship, processes, products and service.
Let me give a clear example using Mr Chukudi Nkwakolo once again who import phones, he might be sued either because of a breach of contract or because of poor quality products etc.
This type of risk solely depends on the type of business and can be avoided if they business follow the due process of the country’s constitution and have its own policy, rules and regulation.
Many establishment associate this risk to the starting stage of a business, rather this risk is closely related to the day to day activity of a business.
Funding risk arises when the funds to run a business is wearing thin, this risk come about either when a business has lot of debtors or has a long legal suit with another business or spend a lot. Many business has shut down because of this risk and it is advisable to take it very serious.
If Mr Chukudi Nkwakolo decides to give out loans WITHOUT collaterals and DO NOT have a good monthly budget on how to manage its income and expenses then it might be bankrupted some or later.
One of the best way to offset this risk is to have a budget and closely follow it
There are other risk which enterprises pass through, some are more risky than others, such as POLITICAL RISK which happens when a country change its government or political party like what happened in 2015 in Nigeria where the formally ruling party lost to another accompanied with recession in the country this caused so many international company and local establishment to shut down.
We have OPERATIONAL RISK which happens when the managing term, board of directors or individuals etc. do not run the company to its full potential or in a factory where they do not make use of the machineries, this can cause a shortage of productivity in that company
This risk comes when a financial market becomes too thin (less buyer and more sellers or less seller and more buyers). This risk varies from different Financial Market, example a stock brokers who buys a share might not find an available seller and thus is in the grasp of a loss if he do not sell it quick.
There is also another risk called REPUTATION RISK, this risk come about when a company has faced series of law suits and fears that it will lose its customer and its reputation such risk might make that business to loss it credibility which will turn out to be series of loss and in the end might shut down.
Do your business pass through any of these risk and is in the verge of collapse or did you manage to offset your risk , please do comment below I love to hear from you and if you find this article fascinating please share with your friends using the share button and do not forget to subscribe below .