Research on Financial Risk of the Enterprise

Shanshan Li

School of economics and management,

Henan Polytechnic University, P.R. china 454000

E-mail:shanshanli@http://

Abstract—With the intensification of market competition, the Businesses cannot do without financing. However, financing

will surely bring out risks. Fundraising risk means a variety of financial risk faced by enterprises increases day by day. This

paper primarily probes into the definition, types, causes and unpredictable, which is from changes in supply and demand of potential harms of financial risk, and puts forward some detailed funds, the whole macroeconomic and market environment countermeasures to avoid it. changes, and etc. Fundraising risk basically include interest Keywords Financial Risk; Risk Identification; Risk Prevention rate risk, exchange rate risk, refinancing risk, the financial leverage and purchasing power risk. Interest rate risk means

the cost of financing changes brought the fluctuation of price I. INTRODUCTION

of finance assets; Exchange rate risk refers to the uncertainty

With the strengthening of economic globalization and market in the foreign exchange business due to exchange-rate mechanism, the competition between enterprises is also flexibility. Refinancing risk means the uncertainty for getting tougher. More enterprises are facing more severe companies refinancing. The financial leverage is the enterprise financial risks. Financial risk focuses on the management of

use debt adjustment rights and interests capital income

uncertainties in companies’financial operating effects. The

method. Enterprises can use the financial lever to bring the

underestimation of financial risks and ineffective management

interests of the financial lever to enterprise shareholder or the

would cause tremendous economical loss, and some is close to

going bankrupt even, close down. So the research in enterprise owner rationally. As a result of financial leverage is awareness, prevention and control of the financial risks has influenced by many factors, in the interests of financial become an important subject. The study of the financial risk leverage was also accompanied by incalculable financial risks. management is not only theoretically but practically Purchasing power risk refers to some effect on finance

affected by currency fluctuations. significant.

2) Investment risk

BASIC THEORY OF FINANCIAL RISK II. THE Investment risk refers to risk due to the future of the enterprise

income uncertainty, future income and practical; the deviation A. the Definition of Financial Risk

between the expected return. When developed areas where

Financial risk, basically speaking, refers to a variety of

market development is not mature, and more likely to be a

unpredictable and uncontrollable factors in the financial

direct result of the increased level of investment risk factor. In

system existing objectively, which result in the fact that the

China, investment has two forms, that is, direct investment

financial benefits actually deviate from the expected financial

and securities investment. Typically, direct investment

benefit, causing the losses of the financial benefits. Financing

involves the purchase of assets such as land, plant. Securities

risk is the existence of an objective economic phenomenon, a

investments include investments in shares and in bonds. For

variety of financial risks in a concentrated expression,

many decades investments in shares and bonds are one of the

throughout the various segments of the financial activities.

most commonly used and popular kinds of investments.

From the economics point of view, as a microeconomic risk,

Investments in shares is a kind of profit mechanism of mutual

the modem corporate financial risk is the currency

benefits and risks. The biggest characteristic of bonds invest is

manifestation of all risks that companies faced, which is the

stable income, higher safety factor, but also has strong

concentrated on expression of all risks.

liquidity. Whether investing in stocks or bonds, in the many

B. the Types of Financial Risk uncertainties of the market environment, still have to grasp the In the market economy conditions, the financial risk is an sound principles of risk prevention.

3) Risk of income distribution. objective existence. For business, financial risk is closely

related to the managements about the raising and assigning of Risk of income distribution, often called transaction exposure,

means bad fund movement because of uncertainty in

fund, especially fund safety. It reflecting risks when

production, supply and sales, resulting in changes in value.

enterprises are in financial activity and dealing with financial The contents of this risk mainly include: purchase risk, relationship. There are several different types of financial risk, production risk, inventory liquidation risk and accounts including fundraising risk, investment risk and risk of income receivable realizable risk. Purchase risk means insufficient distribution. supply of material for changes what vendors made in raw 1) Fundraising risk materials, and the changes in actual payment period for

different credit conditions and payment. Production risk refers to changes in the production process for new information, changes in energy market prices and personnel changes and etc. Inventory liquidation risk refers to product sales blocked for the product market changes. Accounts receivable are relatively liquid assets, usually converting into cash within a period of 3 to 6 days. Account receivable is an important part of state expenditure of current assets, the strong or infirmness of liquidity has a direct affection on cash flow and working of performance of enterprise. So the corporations must pay attention to the risk on their accounts receivable, and learn to analyze the risk and control it.

III. THE CAUSE OF FORMATION OF THE FINANCIAL RISK A. External Factors

Enterprise Financial Management of the external environment is changing the financial risk arising from the objective reasons. External factors mainly include: economic factors, market factors, tax laws and environmental factors, which will have a significant impact on financial administration of enterprise.

1) Macro economic changes

Macro economic changes to the enterprise, are difficult to accurately predicted and cannot be changed. It will bring adverse changes in financial risk. For example, the rise of oil price would make transportation enterprise increase operating costs, reduce the profits, therefore cannot achieve the financial revenue.

environment, the enterprise's financial decision-making is also changing. The enterprise financial decision-making changes also can make the financial risk. B. Internal Reasons

1) Administrators’ low awareness to the risks

Financial risk is objective existence. As long as financial activities do, financial risk will inevitably exists. In reality, many administrators are lack of knowledge and risk awareness in the financial management. In their opinions, as long as they make good use of funds, the financial risk will disappear. Obviously, administrators’ low awareness to the risks is one of the important reasons the financial risk arising.

2) Lack of seriousness for financial decision-making

Financial decision-making error is another important reason for financial risks. Avoiding financial decision-making error should make financial decision-making more scientific. At present, experience decision-making and subjective decision are common phenomenons during our country enterprises’ financial decision-making, which lead to the decision-making errors occur frequently, resulting in financial risk arising. For example, in fixed asset investment decision-making process, due to lack of investment project feasibility study, together with incomplete information, investment decision-making errors occur frequently, making investment project cannot obtain the expected returns on investment, and bring the huge financial risk.

3) Unreasonable capital structure

Both domestic and foreign cases concerned indicate that it is

2) Changes in tax laws usually inexpedient capital mode that leads to the companies’ Any enterprise has the legal duty to pay taxes. Tax of the financial difficulties, which sometimes result in their enterprise is a cost; which would increase cash outflow for bankruptcy. Enterprise should make sure of the best structure enterprise, and has important influence on enterprise of capital through a suitable measurement, thus to minimize management. Enterprises will help reduce the tax burden to the cost of capital and maximize its business value. If the lower production costs and increase the profitability of enterprise’s capital structure is unreasonable and lack of an enterprises in space and ability to resist risks. Therefore, effective financial warning mechanism, the enterprise enterprise hopes to reduce the tax burden in no violation of tax financial burden is heavy, resulting financial risk. law. To reduce the corporate tax burden, only by careful

4) Sales on account blindly arrangement, financing, investment and profit distribution or

Sales on account has be used as the one of the important means other financial decision-making. If the tax law changes make

the enterprise's financial decisions emerge uncertainty ,these that promotes products of business enterprise, and already

more and more were adopted by large business enterprise. If factors may cause the financial risk of the enterprise.

there is no efficient way to control the account receivable

3) Interest-rate changes aggradation, it will be more and more while the quantity of When the enterprise raises fund, the interest rate is usually sales is bigger and bigger, and it will affect the normal produce. fixed. If the future interest rate declined, enterprise still pay And bad debt risk is an objective existence, as long as there is higher interest rates according to the original contract, thus likely to have bad credit. All this factors would affect the this must increase the financial risk of the enterprise. If the liquidity of enterprise assets and security, and add business future market rates rised, the enterprise can pay low interest by expense, resulting financial risk. the contract . But if we look at it in another light, with the higher interest rates, the currency appreciation pressure IV. COUNTERMEASURES OF FINANCIAL RISK PREVENTION increases. Due to the revaluation, the corporate bonds may be

A. Optimize Capital Structure redeemed by the principal stress, thus increasing enterprise the

burden of the financial risks. If the enterprise finances using The choice of capital structure in enterprises is an important foreign currency, Changes in exchange rates also will make financial decision. The enterprise should optimize capital

structure and improve returns on investment, effective risk financial risk.

management and control.

In addition, industrial policy also has important influence on the enterprise's activities. Because the government's policy to 1) Select the optimal financing plan industry would always be affected by the economic

Operating with debt is a double-edged sword, it can bring greater revenue, but also may lead to the loss of fundraising risk. So the enterprise must do moderate debt management. How to determine the appropriate liabilities “degree” is more complex and difficult. Theoretically, the theory of proper capital structure has already been stated in detail in the accounting of finance management. In practical work, “degrees” should adapt to enterprises’ specific conditions. For the enterprise that the production and management are going well, their debt ratio may be high. Otherwise, their debt ratio appropriate low.

2) Reasonable refinancing

Refinancing bring in money also brings a certain financial risk for enterprises. Therefore, When enterprise determines the refinancing plan, they should consider a range of factors, to reasonably arrange financing options. Refinancing scales should be controlled in view of total assets of enterprises. Special department should de arranged to be responsible for auditing the use of funds. These measures can effectively not only reduce the financial risk brought by refinancing, but also make the maximum possible use of the effective marketing tools.

B. Supervise Investment Management Activities

comprehensively

1) Strengthen a feasibility study on investment plan

Improving the efficient when enterprise works the funds is a key financial problem. Long-term investment can make uncertainty factors cancel out by various constitute investment, to reduce the risk and realize the stable income. Moreover, the enterprise should control the process of investment, strengthen performance appraisal and improve management information systems. As for short-term investments, the enterprise should strengthen the speed of inventory converted into cash , account receivable converted into cash as well. Thereby improving asset liquidity. In addition, selecting the appropriate proportion of Long-term investment and short-term investment is the effective method to prevent the investment risk.

2) Discreet choice for merger acquisition

Over recent years, corporate merge and acquisition (M&A) are booming in China. Enterprises have strange preference for merger, because the M&A can not only bring huge economic benefits to the enterprise, but also can improve the financial statements for the company. On the other hand, because the M&A news for enterprise is generally good news, this can help enterprise promote the company and stock, to gain more help In the capital markets.

In the course of corporate merge and acquisition, the evaluation of target corporate value is rather essential .Before mergers happen, enterprises should have an accurate estimate to merger object. The accuracy of valuation the merged enterprise owned depends on the Enterprises’ mastery of the information. Mergers are also more likely to success. If necessary, enterprises can employ investment bank to conducting a thorough job analysis aiming at the target enterprises’ industry environment, financial status and management ability. So enterprises can make reasonable expectations to the target enterprises’ future profitability, and make valuations more accurate, which favors the reduction of pricing risk.

C. Strengthen Accounts Receivable and Inventory

Management

1) Accounts receivable management

The account receivable management is the key point of an enterprise financial control, which passes through the entire process of the enterprise financial control. The account receivable management level is restricting the enterprise whole management level promotion. The scientific management method of account receivable is not to reduce the income as far as possible, moreover, decrease the risk of account receivable to a minimum. Firstly, the key of receivables is management of enterprise credit risk. Enterprises should establish specialized credit management institutions. Seccondly, enterprises should perfect collective policy. After the occurrence of receivables, enterprises should take various measures to make sure that all credit accounts are collected .When a business recognizes that a debt is unlikely to be repaid, the debt is written off as an expense in the profit and loss account. Thirdly, play the role of internal auditing. Internal audit develops the functions of supervision, evaluation and risk management in corporate governance.

2) Inventory management

Inventory management plays an important role in the management of enterprises. Stock circulation can help enterprises realize the stable and has strong cash flows. The enterprise should optimize inventory management skills and operation way of working. In the process of inventory management, enterprises must strictly comply with financial regulations, and inventories accurately, to achieve the account, the thing, the card is consistent. Inventory control method has ABC, economic order batch, quantitative order, time order and zero stock, etc.

D. Play the Other Aspects of the Constrain Function 1) Make full use of the public accounting firms

In the financial risks of enterprise management, accounting firm, as the intermediary organization which direct audit enterprise financial statement of, can play an important role. In accordance with China's current law, before presenting to external users, the financial statements must be examined by the qualified public accounting firms. This can not only, to a certain extent, guard against mistakes and irregularities in the financial management of enterprises, but also help enterprises to make certain financial adjustment in the audit process. Some companies also hire an accounting firm for company's financial advisers. Therefore, the accounting firm plays a very important role on identifing and preventing financial risk.

2) Strengthen the risk consciousness

Financial risk management depend on enterprise's full participation. The enterprise will work to be more aware of risks, improve related systems, tighten debt management and fend off financial risks. Enterprises must make employees understand a truth, that is, the risk of enterprise financial affairs exists in every link of enterprise financial management, and risk prevention must be throughout the financial management all the time.

V. CONCLUSION

The existence of financial risk will undoubtedly have big impact on the production of business. Because the risk of enterprise financial affairs exists in every link of enterprise financial management, risk prevention can't just rely on the financial department. Every part should cooperate with each other, in this way, can risk prevention be more and more perfect. Enterprises should attach importance to financial risk management, and take effective research on financial risk control and management, to raise the economic benefits of the enterprise.

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[3] LIU Ji-Wei, Problems and Countermeasures of Enterprise Finance

Risk Management in China, Journal of Jiyuan Vocational and Technical College,2009(03),pp52-54(in Chinese)