Finance is full of uncertainties, so a strong risk management strategy is essential. A clear process enhances confidence and reduces uncertainty, making it easier to handle challenges. The University of Northern Colorado (UNC) online Master of Business Administration (MBA) with a Concentration in Finance program addresses these needs with courses like Advanced Financial Management, Financial Analytics, Investments and Fraud Analytics, equipping students with the skills to manage risks effectively in advanced roles.
What Is Financial Risk Management?
Managing financial risk is a continual process of reducing or eliminating the chances of risks occurring, according to Investopedia. Teams must build systems to identify and target potential threats, though identifying all possible scenarios can be challenging. For example, when planning a return to the office, teams must consider health issues, regulations and employee preferences, as failing to attract talent might impact potential gains. After identifying threats, leaders should assess their likelihood and develop mitigation strategies.
Risk management also involves evaluating potential downsides in investment decisions and deciding whether to accept or mitigate them. Investopedia provides some examples of how finance professionals manage risk in different situations:
- Investors choosing low-risk U.S. Treasury bonds instead of lower-rated corporate bonds
- Fund managers identifying the potential risk of currency price changes and using currency derivatives to hedge that risk
- Stockbrokers employing options, futures or other instruments to offset potential losses in investments
- Money managers using portfolio diversification and other strategies to account for the risk of losses in specific stocks
This ongoing process balances risks against potential rewards, with varying degrees of risk across investments.
What Is Risk-return Analysis?
Risk-return analysis is a key concept that examines the relationship between the risk of loss and potential financial returns. It operates on the principle that higher risk is linked to higher potential returns and vice versa, guiding investors to make informed decisions on asset allocation. By analyzing both risks and potential returns, investors can better align their choices with their financial goals.
The analysis begins by assessing an investment’s risks and returns. Risk refers to the uncertainty of achieving expected returns, often measured by statistical techniques like standard deviation or variance, which indicate the investment’s volatility. Returns are calculated as a percentage of the initial investment, including income and price changes. Risk-return analytics help investors balance potential rewards against risks, which is crucial for complex investments and portfolio diversification.
What Types of Risks Do Finance Professionals Manage?
The first step in creating an effective financial risk mitigation plan is identifying the types of risks that could impact a business. Understanding these specific nuances allows for better planning and more effective mitigation. Here are five common types:
- Market risk involves external forces within a company’s industry, such as changing customer preferences or technological advancements, requiring businesses to adapt to survive.
- Competitive risk arises from other companies in the market changing prices, product features or distribution strategies, potentially upsetting a business’s sales.
- Liquidity risk relates to a company’s capacity to cover short-term obligations using short-term assets. This risk is higher when cash flow timing is misaligned.
- Leverage risk develops from using borrowed capital. It increases with rising interest rates, lower-than-expected returns and when a business maxes out its credit.
- Global risk comes from changes in government policy, exchange rates, foreign economies and supply chain issues, which can impact sales and profitability.
Risk Mitigation Methods and Strategies
Effective risk mitigation starts with identifying potential threats such as team turnover, product failure or scope creep. Following this, strategies are employed to lessen or eliminate these risks. Here are seven key methods:
- Assume and accept risk: Understanding potential risks and their consequences ensures team preparedness and collective awareness. For example, recognizing budget overruns enables informed planning.
- Avoidance of risk: Proactively identifying and avoiding risks, such as through thorough product testing, helps prevent failures. For instance, a well-managed schedule can prevent conflicts and delays.
- Controlling risk: Minimizing the impact of identified risks is essential. Actions like closely monitoring and adjusting the budget help prevent overspending.
- Transference of risk: Shifting risks to external parties, such as vendors or financial advisors, helps manage impact. For example, holding financial advisors accountable for budget issues allows the team to focus on core tasks.
- Watch and monitor risk: Continuously monitoring risk factors is crucial. Project management tools can track schedules and performance to keep risks under control.
- Carry insurance: Policies transfer financial risks, covering areas like product liability and business interruption. Balancing premium costs with coverage benefits is important.
- Maintain emergency funds: Establishing cash reserves or lines of credit prepares a business for financial impacts, aiding in the management of unforeseen challenges.
A Foundation in Risk-return Analysis and Risk Mitigation Strategies Is Critical
Risk management requires more than just basic knowledge — it demands expert skills in risk mitigation. The online MBA in Finance program at UNC prepares students to excel in high-demand roles, such as investment analyst, financial manager and operations manager. For example, according to Kaplan Schweser, financial risk managers can leverage their risk management knowledge to earn up to $150,000 annually, while financial risk analysts can earn up to $118,000 with their risk assessment, reporting and management skills.
By blending conceptual knowledge with hands-on activities, this program equips individuals to tackle financial risks effectively, utilize financial modeling and conduct thorough risk-return analyses. This approach ensures graduates have the insights to leverage their experience and drive meaningful outcomes in corporate and nonprofit financial management.
Learn more about UNC’s online Master of Business Administration with a concentration in Finance program.
