How to Mitigate Financial Risk

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Cash flow is the lifeblood of most successful business operations. The more access a company has to cash flow, the more likely it is that management can pursue profitable opportunities when they come along. This type of risk is referred to as financial risk, and investors usually want to invest in companies with low financial risk.

Sell inventory and current ssets. The easiest way to raise funds is to sell Current assets. Current Assets are listed first on the balance sheet as they can all be liquidated in one year or less. Discuss the sale with bankers and brokers that specialize in the asset.

Request a sale leaseback from your banker This only works if you own the building in which you operate. In most cases, your bank will purchase the building from you and then lease it back to you. This provides a large cash inflow from the sale of the building which can then be used to pay off debtors.

Issue stock. While equity is considered costlier than debt, a company is not required to pay stockholders back. There are also fewer restrictions connected to stock issuance compared to a bank loan. Contact your banker to request information about issuing stock. In general, stock issuance costs 7 percent of the total amount raised.

Request longer terms from suppliers; that is, see if your suppliers will be okay with financing your purchases over a longer period of time. While this is essentially a loan, it is not considered debt. The result will be an increase to accounts payable.

Shorten payment terms with customers; that is, reduce the amount of time customers are able to maintain service or own a product on credit. The result will be a decrease in accounts receivable.

Pay off debts with additional cash raised. The more you can pay off your debts the lower your financial risk will be. Contact bankers to pay off bank loans first followed by bondholders.


About the Author

Working as a full-time freelance writer/editor for the past two years, Bradley James Bryant has over 1500 publications on eHow, and other sites. She has worked for JPMorganChase, SunTrust Investment Bank, Intel Corporation and Harvard University. Bryant has a Master of Business Administration with a concentration in finance from Florida A&M University.

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