📚 node [[five financial corporate risks]]

Five financial corporate risks

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"You never go broke by making a profit"

The five financial risks are:

  1. Business
  2. Market
  3. Credit
  4. Liquidity
  5. Counterparty

Business

Buy low, sell high

  • Business risks exist if you can't do that
  • You can do this for a little while
  • But eventually, this will kill a business
  • You need a sustainable model

Market

Threaten a company because financial markets move

  • Interest rates
  • Foreign exchange rates
  • Currencies
  • Commodity prices

Credit

"It's not what you have, it's how much you can borrow that matters"

  • Downgrade risk (downgrade in company's credit score)

Liquidity

The potential risk that a company will go bankrupt because it lacks the cash to pay bills

  • Can't pay financial obligations
  • Need to be able to buy low to sell high
  • Need to buy equipment
  • Need to meet debt obligations
  • You need cash on hand to maintain day-to-day, big investments cause risks here

Counterparty

If another party is involved in a business deal, risk to them is risk to you

  • If you buy from a vendor
  • Sign a long-term contract
  • Hedge with a contract
  • 3rd party counterparty risk management is a counterparty risk
  • Choose your business partners wisely
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