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Is your business in financial risk? Use these two types of analysis to find out

by , 05 June 2014
When it comes to the success of your business, one of the most crucial steps you can take is to see what dangers you may run into.

This is why you have to analyse your business's financial risks.

But analysing your financial business risks is about more than just seeing where you're losing money.

Keep reading to find out exactly what you need to do to identify your company's weak spots.

Two groups of financial risk analysis

The Practical Accountancy Loose Leaf says when you look for your financial risks you must look at:
 
1. Capital structuring risks; and
2. Liquidity risks.
 
These require you to look at different parts of your finances, so let's take a closer look at what you need to do...
 
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Three accounting record risk areas to watch out for
 
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What you need to look at when doing Capital Structuring Risk analysis

The most important thing to look at when doing this kind of financial risk evaluation is the amount of debt your business has.
 
After all, the more debt your business has, the more likely it is that the bank will liquidate your business.
 
To analyse this risk, you must look at your company's:
- Total debt ratio;
- Interest cover ratio;
- Debt to equity ratio; and
- Loan to value ratio.
 
 You must compare these ratios to other businesses in your industry to get a better understanding of their values.
 

What you need to look at when doing Liquidity Risk analysis

In this financial analysis, you must look at if your business has short-term loans it can't pay back. This could happen because even though you have assets in your business, you might not have the cash flow to pay back your loans. 
 
To analyse this risk, you must look at your company's:
- Current ratio;
- Acid test ratio;
- Debtor's collection period;
- Creditor's payment period; and
- Stock turnover period.
 
You must monitor these ratios very carefully as they're a crucial part of liquidity risk management.
 
By regularly doing these two kinds of risk analysis, you'll be able to rid your business of problems and keep it healthy.
 
 


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