Risk Management and Its Importance in Commercial Enterprises
In today's world, economic conditions are getting more and more challenging and making the activities of commercial enterprises difficult. The following are the risks that are faced by commercial enterprises in the economy: Interest risk, exchange risk, political risk, liquidity risk, and market risk.
Such risks play a huge role in changing the assets and liabilities of an enterprise. So, the initiatives taken to eliminate and not be affected by the adverse consequences of these changes is called risk management. Risk management is an activity that requires enterprises to have field knowledge and implement the solutions they come up with. In this article, I will talk about ways of managing the risks that I have just mentioned.
The key to not being affected by the interest risk is to ensure higher operating revenues of an enterprise than their financial expenses.
Commercial Enterprises obtain resources from the financial sector for the management of their capital. While providing resources, they pay a surplus cost to the resource. So, when we compare this surplus amount paid by the enterprise to the profit margin of the company, the surcharge load, i.e., interest and/or profit share, should ideally be below the profit margin. This way, the enterprise can sustain and expand its commercial activity. In a general view, the key to not being affected by the interest risk is to ensure higher operating revenues of an enterprise than their financial expenses.
And the key factor in managing the exchange risk is to predict the value changes of the Turkish Lira against foreign currencies;
Enterprises purchase the raw material they need for production based on their exchange rate. In this case, if the raw material is entirely supplied from a foreign country, if it takes up a significant place in the production input of the enterprise, and if the enterprise sells its products domestically, then we can talk about an exchange risk. In other words, if the enterprise's purchases are dependent on the foreign exchange and sales on the Turkish Lira, it is required to manage this process. The key factor in managing the exchange risk is to predict the value changes of the Turkish Lira against foreign currencies. In a floating exchange rate system applied in our country, exchange risk turns into an important managerial risk factor for manufacturers and exporters.
The most important indicator of minimising the political risk is ensuring economic and political stability. When this is achieved, the uncertainty will disappear, and the confidence of enterprises in the market will be ensured;
Keynes identifies risk and uncertainty to be different concepts. For Keynes, in cases where there is a risk, the events recur, and the probabilities of the recurrence of events can be calculated. Calculating the probability is not possible in uncertainty, and uncertainty cannot be controlled. The most important indicator of minimising the political risk is ensuring economic and political stability. When this is achieved, the uncertainty will disappear, and the confidence of enterprises in the market will be ensured.
Liquidity risk may arise when a company borrows more than what it earns;
Enterprises use foreign resources when they lack equity. What is important here is the maturity of the foreign resource used and the increasing interest and/or profit share load. The enterprise can use foreign resources for the short or long-term. The biggest risk here is that short-term bank loans are higher than long-term bank loans in the balance sheet. And this can lead to a liquidity problem. Also, if the business borrows more than what it earns and its earnings are tied not to operation capital but to fixed assets, for example, a liquidity problem may arise here as well.
Market risk may arise from the failure of a company to renew itself against new conditions;
It arises from the changes in the conditions of the market in which the company operates. If the enterprise does not renew itself in parallel with consumer habits and does not act in accordance with the demands of the consumers for pricing and product availability, a risk may arise.
The risks can be minimised when the resources are used accurately in companies that procure funds from participation banks. For companies that may face interest and liquidity risks for using foreign resources and exchange risks during their production and wish to manage them, participation banks, which are among the financing institutions that provide foreign resources, stand out.
As it is known, participation banks do not give cash loans to enterprises. They purchase the goods that the enterprises need in advance and sell them these by applying a certain maturity difference. The cost of the goods is paid to the seller. In this case, the enterprise cannot use foreign resources outside of its business activities. It sends the goods that it receives directly to the production process. If the company carries out its sales domestically in this process, it should not provide exchange-based resources. Such transactions with participation banks may especially minimise the liquidity and exchange rate in enterprises.
What to do for risk management?
The company's balance sheet should be analysed first to manage these risks. Determining to what extent these risks affect the business is the main step of the measures to be taken in risk management. The following are some examples of such measures:
- Regulating if there is high mobility in opposite directions in short periods of cash flow,
- Ensuring the harmony of loan interest/profit share rates with the profitability of the enterprise,
- Ensuring the harmony of the loans with the maturity of the receivables arising from sales,
- Examining the production cost process of the enterprise and controlling the cost,
- Categorising buyers according to their business solvency,
- Synchronising the actual situation with the accounts in the balance as much as possible,
Retired Participation Bank Manager/Independent Accountant and Financial Advisor