A Simple Guide on Business Risks and Returns

Posted by D&V Philippines

Feb 23, 2015 11:00:00 PM

Keeping the company engaged in different investments maintains your financial stature. Venturing business risks and returns is an ideal way to sustain this growth and stability as you sail in the industry through the years.

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Leap and the net will appear, or so says that old Zen saying. Unfortunately, it is not always that easy. As Chief Financial Officers (CFOs), there are a lot of things you just can’t put at stake. Accumulating more wealth at the expense of placing the business and your other assets in peril is one of them. So what should you do with these risks? How can you initiate satisfactory returns at a level that goes well with the risk tolerance of your enterprise? These are just some of the things you need to understand before jumping into investments.

What are ‘Risks and Returns’? 

Risk is the possibility that the money you put into investment will not yield the outcomes you are vying for, while return means either the gains or losses from an investment with an associated risk.

Expecting a significant growth in your investment in spite of the likelihood of declining stock market values is a classic example of a risk. If you examine it closely, you will realize that risks are an inevitable part of investments. This is especially the case since high potential returns inadvertently go with high risks.

Related: 4 Ways to Manage Financial Risks 

Dealing with risks and returns 

As individuals with strong entrepreneurial spirits, it is only natural for CFOs to push through with certain business risks. Otherwise, it would be difficult to step up and increase the money coming in from their business. But in any case, it is important to remember the importance of risk management. The rule of thumb in risk management is to assess your risk and to help you mitigate them in the long run. 

Assessing your risk is a tedious process that involves keeping a close eye on your critical business numbers and setting a limit on the level of risk that is considered healthy for your SME. Implementing business risks and mitigation strategies, along with CFO’s advisory, creates better chances of pushing your finances in the green and increasing your cash flow’s stability. Otherwise, you will put your business and your other assets in jeopardy.

Understanding ‘Diversification’ 

There are some financial experts who advise their clients not to put all their eggs in one basket, so to speak. This advice sums up what diversification means. 

In a nutshell, diversification is a technique that allows investors to increase probabilities for their potential returns by dividing their investments into different investment instruments. 

For example, you might opt to put half of your investments on money market funds and the other half on stocks. The process of splitting your investments keeps the blow from being too harsh in case your investments get caught in a drop in stock market values or a worsening economic problem.

Note that while diversification does not shield you from loss, it significantly mitigates risks while increasing your chances for gaining potential returns.

 

Risk and Return in financial management 

In terms of financial management, risks are visualized according to its positions in a spectrum. According to an article, those in low risks are short-term government bonds with low yields; those in the middle parts contain the investments on rental property or high-yield debt. As for the high-risk end, there are the equity investments, futures and commodity contracts, among the others. The return on investment (ROI) is the expected generated income from the said investments. 

Discovering what you can about business risks and returns and using that knowledge to make profitable business decisions will help you and your business to thrive financially. 

For more information on managing risks and following ideal strategies on wealth creation, you may download our Premium CFO Solutions guide or get in touch with our financial experts at D&V Philippines to know how we can help you fulfill your CFO responsibilities better. 

New call-to-actionThis post was first published 23 February 2015  and edited 23 February 2021.
Edited by: Maria Katrina dela Cruz

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