The method of avoiding financial risk is to develop measures of an internal nature that completely exclude a particular type of financial risk.
Key measures to avoid financial risks include:
- No financial transactions at excessive risk
Despite the high efficiency of this measure, its use is limited, as most financial transactions involve the main production and commercial activities of the enterprise, which provide regular revenue and profit generation.
- No High Leverage
Reducing the share of borrowed financial funds in economic turnover avoids one of the most significant financial risks - loss of financial stability of the enterprise.
However, this risk avoidance leads to a reduction in the effect of financial leverage, that is, the possibility of obtaining an additional amount of profit on the invested capital.
- No overuse of current assets in low-liquid forms
Increasing the level of liquidity of assets avoids the risk of insolvency of the enterprise in the future period.
However such avoidance of risk deprives the enterprise of additional income from expansion of volumes of sale of products on credit and partially generates the new risks connected with violation of rhythm of operational process because of decrease in the size of insurance raw material inventories, materials, finished goods.
- No use of temporarily available cash assets in short-term financial investments
This measure avoids deposit and interest risk, but creates inflation risk as well as loss of profits.
The above-mentioned and other measures to avoid financial risk, despite their radicalism in the rejection of certain types of them, deprive the enterprise of additional sources of profit generation, and consequently adversely affect the rate of its economic development and the efficiency of its own capital use.