Question

Describe financial risk management, and how it can effectively be used by a sports business. What risk management strategies would be used to protect the business’ finances?

Answer 1

Financial risk management is the process of dealing with, in a systematic manner, the different types of risks that a business is associated with. It should be noted that all businesses have an inherited element of risk and financial risk management enables identification of those risks and managing them as well. A business is exposed to the following risks – operational risk, credit risk, market risk, forex risk etc. Financial risk management helps in mitigating all these risks and optimizing the operations of the business.

Financial risk management can be effectively used by a sports business. A sports business can use tools of financial risk management to anticipate different types of risks that its business can be vulnerable to and then mitigate them in an optimal manner. A sports business is exposed to operational risks due to staff turnover, fraud etc. It is exposed to market risk due to low demand during lean season and off season. A sports business is also susceptible to issues like corruption and drug abuse as well. A sports business can use financial risk management to understand as well as manage these risks and then developing a plan of action that will put in place proper control mechanisms.

The risk management strategies that would be used to protect the business’ finances are making a hedging decision, reducing the volatility of cash flows, better management of operating costs, better management of payment terms, getting a better understanding of commodity price exposure etc.