What is Financial Risk?

A financial risk is any decision that may cost the company or the individual money but may have a return on the investment that creates a profit. Larger risks have the opportunity to provide a larger reward, or a larger return on investment, but they also increase the amount that may be lost if things go badly. Most investments are a risk at some level, with those that are guaranteed to pay back the original being mostly risk-free, and the ones that offer higher returns will have a higher risk of getting nothing back.

Financial Risks, and Valued Time

All new businesses represent a financial risk to some degree. It will also involve the risk of losing time and energy. While money is one thing that is considered, it is also necessary to consider the time that would be involved to repair the loss or to earn that money back. Time is one thing that can never be replenished, and when you are working for every dollar risking income, stability, and your past history of employment in order to try a new business or a new career may be a bigger loss than the amount of money that was invested.

Before a startup launches, an expansion begins, or a new product is released, the financial risk must be calculated. This will include the amount of money that is involved and the interest or other return that it is currently earning. As your fractional CFO would say, when investing that money into another project or investment, it not only risks the money that is being invested but also the money it would have earned through interest or other investments. This makes it difficult to know what the best investment is, and there is always a risk to moving money that is currently earning interest. It is an increased risk due to the lost opportunity that is being passed in order for the new one.

Financial Risks in Business

For a business taking a big financial risk is not something that is easily undone. This may be as simple as signing a lease on a new space, ordering extra products to improve delivery times, or investing in a new employee who may not work out. It can also be a more unexpected risk that seems less intrusive like hiring a consultant who may give bad advice, application fees for grants or other funding, or traveling to speak to investors and suppliers.

Not only is investing or starting a new business a financial risk but not doing so is also a risk in its own right. If you do not take chances, you may miss out on large amounts of potential income. Those who have missed out on investment opportunities that made other people a great amount of money may be more willing to take that risk with the next opportunity. The ROI is the main concern when deciding on any financial risk and there are many unknowns that will affect the outcome, which is why creating a business plan is so important to have and to review before making a decision.

Financial risk surrounds each person every day in some way. There are risks on both sides of each decision, both financial and other, and the added risk of valued time and energy that may be lost increases the consideration of each decision.

No business will make money without taking risks any, so the weight of the reward and the amount that may be gained is important to consider before making a financial decision.

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