Businesses are subject to a wide range of risks – from fraud to late payment, interest rate risks and credit risks. Businesses often want to know which should be their most pressing concern but, as with all operations, it’s important to balance the different types of risk according to their impact. To ensure P&L sheets stay balanced and companies have sufficient working capital, both credit risk and interest rate risk need to be managed carefully.
Following the global financial crisis, interest rates were at record lows due to central bank policy. This meant interest rate risk was relatively negligible. However, with central banks taking a less interventionist approach, and liquidity no longer being pumped regularly into the system, interest rates are being allowed to grow.
While the UK’s interest rates have stayed at record lows, we’ve see two rate rises in the US and yield curve action from the Bank of Japan. Interest rate risk has risen again, and is now as important a factor for businesses as credit risk. Although these dual elements give rise to more volatility in the market, it’s also a sign that markets – and economies – are returning to health.
In financial markets, investors often choose a barbell approach to balance their risks when investing in credit. This works by pairing government bonds sensitive to interest rates with high-yielding credit assets. Government bonds typically do well in times of volatility and slow economic growth while high yield assets offer greater returns as interest rates rise and growth picks up. Holding positions on both sides of the barbell can counter weaknesses on either side, which is particularly useful because the prices of government bonds and credit don’t tend to increase or decrease at the same time.
The same principle extends across business, in that companies need to know where their risk lies and how to strike a balance. Diversifying operations and investments is an important part of business strategy and applies just as much to market investors as business managers. Understanding the factors at play in the environments in which you operate can help you mitigate risk and make better business decisions.
Risk management best practice incorporates everything from knowing your supply chain to understanding the economic forecasts in the countries and industries in which you do business. Risk monitoring and portfolio management are a crucial part of maintaining a healthy operation.
With effective risk management, not only will you keep up to date with the latest developments, you’ll also mitigate supply chain risk and spot opportunities by identifying positive financial changes.
Similarly, portfolio management provides you with up-to-the-minute credit report information, competitor tracking and customer analysis. Graydon’s Augur Score enables you to ensure your business excels by providing insight to revolutionise your credit management process.
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