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Financial Risk Management in SMEs

Financial risks exist everywhere; it cannot be avoided and has a certain influence on a company’s production and management.

As businesses grow, they change. Higher revenues require additional resources, more support and a greater sales effort. Additional business units are opened, and communication lines extended. More people are taken on, and customers demand quicker service at lower costs to them.

Once a business reaches this stage in its development, there is a need for the organization to transition from a start-up structure to one where a management expertise is required to be created right at the heart of the decision-making process.

Companies need to make a full understanding of the characteristics, the present situation and the causes of financial risk in order to survive in the market competition and put forward effective prevention and control measures, and thus lower the possibility of occurrence of risks to ensure their development.

Below preventive measures can be applied by SME’s in order to mitigate financial risk:

  • Strengthen the management of flow of assets such as cash, inventory and accounts receivable

  • To establish a perfect internal control system

  • To develop a reasonable salary system and strengthen personnel training mechanism

  • To make the reasonable adjustment of capital structure

  • Enhance the risk consciousness and build system of financial risk aversion

  • Establishing the warning system of financial risk

Financial risk is inevitable in the operation process of SMEs and how to prevent and control financial risk problem is an important task in financial management works.

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