Everyone around the world especially business persons and corporates want financial security for the future and so they choose to invest part of what they have with the hope of making more profit. Investing one’s money can be done in an array of investment throughways such as bonds, stocks, money markets, mutual funds and many others. However, it is important to note that every investment has its own risks even though some are more risky than others. Managers should be flexible enough to properly manage these risks to make sure that individuals and businesses generate profits without having to undergo losses as a result of poor choices. As one develops their financial plans, they should factor in a risk management strategy that can help handle everyday risks. Dr. James Kallman and Peter Christoffersen provide several techniques that could help investors and corporates on how to manage their risks and not end up in huge losses.
To begin with, financial risks are of different types and as such, their management strategies vary across the board. For instance, the way an investor decides to deal with operational risks is quite different from techniques used in dealing with credit risks. Such is to say that different financial risks are handled with different techniques that look to reduce the effect of the risk, avert it altogether or retain the risk although under close management so as to reduce its effect on the investor (Bugalla & Kallman, 2012). Kallman suggests that financial risks need to be handled in a portfolio of management solutions through a management solution tree (Kallman, 2017). The tree, he says, is a visual that represents the available actions in order to create value. He also says that the tree helps and shows a simplified way of how various solutions can be combined into a portfolio of solutions.
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Using insurance to finance losses is just one way to manage any financial risks that would affect the company whether directly or indirectly. This can also be referred to as risk transfer. A company might activate various insurance policies to cover itself and its workers to reduce or even not cover some of the costs that might occur in case of tragedies. For instance, management can activate medical covers for its employees so as not to be liable for any injuries that might occur at work. Christoffersen concurs with this thought as he alleges that using insurance policies only but helps a company to be free from unwanted costs. He says for example if a manufacturing company caught fire and all its equipment was destroyed, it would be cheaper for all that is destroyed to be paid for by an insurance company. Christoffersen (2016), further says that, anticipating threats and activating insurance covers for various potential disasters is just but a step forward to saving a company a lot of money.
Another scenario that the two agree upon as a risk management intervention is initiating safety projects to save lives. This might be in the form of policies and training of staff. Having policies at every department helps a company to manage its staff and reduce the risk of threats at the work place. This means work procedures and other regulations that reduce the risk of threats to be allayed in the open for everyone to see. The two men claim that education is most vital for all executives seeking to minimize the threat of risks. Education should begin with managers down to the support staff. It is vital since it teaches all how to work safely since safety is learned and not acquired out of commonsense. For instance, injuries would rarely be common if employees learn how to handle hazardous material (Bugalla & Kallman, 2012).
To better manage risks, Kallman brings forth what he refers to as prevention techniques. He categorizes these in five subdivisions as; government mandates, education, information management, contractual transfer and operations management. Government mandates like court orders and what have you help to create safe economic systems since things like workers compensation statutes reduce the likeliness of workers suing the employer in case of injuries (Kallman, 2017). Education helps employees to know how to work in safe environment without any risks. Information management includes things like signs at work stations, instructions, promotions and these help staff to know how to avert certain risks. For example aerosol cans have labels that warn users not to swallow of use next to the face. Christofersen, in agreement with Kallman, says that Contractual transfers reduce the likeliness of third parties having to sue and subjecting the other party to losses and these include things like exculpatory agreements (Christoffersen, 2016). Operations management, on the other hand, is one of the most powerful prevention mechanisms that one could deploy so as to avoid financial risks. Here, things like proper maintenance and keeping products in optimal operating condition not only improves productivity but also lowers the chance of loss.
Other than the three, there are several other risk management techniques that can be used to reduce the threat of financial risk. Before committing capital to any venture, the investor should be aware of the standard investment guideline known as diversification. Diversification encourages individuals and businesses to invest in more than one investment. For example, an investor would be advised to split their money in a specific way such that 25% is invested in government bonds, 25% in low-risk money markets, 20% in international markets and the remaining 30% in domestic stocks. Another technique to better manage financial risks is to learn and understand the investment market before venturing. Investors are advised to know what they are putting their money in before committing since it can be a banana skin that can be easily avoided (Vitez, 2017).
References
Bugalla, J & Kallman, J. (2012). Risk Management. Where are you on the risk management career path? Risk Management Society Publishing, Inc. Retrieved 16 June 2017, Vol. 59 Issue 5, p26, 4 p.; Language: English, Database: Small Business Resource Center
Christoffersen, P. (2016). ELEMENTS OF FINANCIAL RISK MANAGEMENT . [Place of publication not identified]: ELSEVIER ACADEMIC Press.
Kallman, J. (2017). RM 101: Risk Management Solutions . Cf.rims.org . Retrieved 16 June 2017, from http://cf.rims.org/MGTemplate.cfm?Section=MagArchive&NavMenuID=304&template=/Magazine/DisplayMagazines.cfm&Archive=1&IssueID=317&AID=3605&Volume=55&ShowArticle=1
Vitez, O. (2017). Five Ways to Manage Financial Risk . Smallbusiness.chron.com . Retrieved 16 June 2017, from http://smallbusiness.chron.com/five-ways-manage-financial-risk-4564.html
