Income Statement |
|
Revenues |
XXX |
(Less) Direct Costs |
XXX |
Gross Profit |
XXX |
(Less) Indirect Costs |
|
Marketing Costs
General Costs
Depreciation
XXX
XXX
XXX
Operating Profit |
XXX |
Interest |
XXX |
Taxes |
XXX |
Net Profit |
XXX |
|
|
Balance Sheet
The Balance Sheet helps you determine the value of a company. There are three components of a Balance Sheet. They are:
- Assets: The Fixed Assets (long-term) and Current Assets (short-term) come under this heading. Current assets include accounts receivable (debtors) of the company
- Current Liabilities: This includes accounts payable (creditors) of the company
- Shareholder’s Equity: The difference between Assets and Current Liabilities includes Shareholder’s Equity. A surplus of Income over Expenditure is added here every year.
The Shareholder’s Equity is an important tool for measuring a company’s book value, and it goes up or down depending on the company’s performance.
Financial statement analysiscomprises analyzing the following ratios under each heading:
- Cash Flow Statement: EBITDA (Earnings before interest, taxes, depreciation, and amortization)
- Income Statement: Interest Coverage Ratio, Net Profit Margin, Operating Profit Margin, and Gross Profit Margin
- Balance Sheet: Debt to Equity, Receivables Turnover, Quick Ratio (cash and liquid assets to accounts receivables), and Asset Turnover
When creating a budget for your company after financial analysis, you need to factor in the different risks that could affect your performance. A financial risk analyst will help you create an accurate budget by considering the economic and regulatory risks. Revenues will be stated after accounting for these risks.
Here are some risks you need to consider:
- Credit Risk: If accounts receivables default in payment, provisions need to be made.
- Currency Risk: If you are an exporter, currency risks are identified and hedged through derivatives.
- Market Risk: A sudden fall in demand due to a market crash needs to be protected through reserves.
Now that we know what risk analysis is all about let us understand the different types of risk analysis.
What are the Different Types of Risk Analysis?
Two types of risks are taught in a risk management course.
1. Quantitative Risk Analysis
As the name suggests, quantitative risk analysis is based on numbers and uses a statistical model to provide the probability of different outcomes. Assumptions are entered into the model as input, and you get a range of outputs.
A financial risk analyst analyzes the output using graphs and scenario analysis. The risk mitigation strategies are decided based on the analysis of the output.
A popular statistical method, Monte Carlo Simulation, creates a probability distribution of all the different outputs. The mean output can then be calculated, and then the standard deviation from the mean is calculated. The higher the standard deviation, the riskier the decision.
The scenario analysis gives the risk manager a clear insight into the worst, middle, and best outcomes. An exporter can analyze the impact of exchange rate fluctuations using this model. A portfolio manager can check the variance of the portfolio by assigning different values to different asset classes.
Unlike quantitative risk assessment, the second method does not use numbers for risk analysis.
2. Qualitative Risk Analysis
The second method, quality risk management, uses a more theoretical approach to risk analysis. Qualitative risk analysis prepares a list of uncertainties and the risk mitigation strategy.
Qualitative risk analysis is used in project risk management. There are two ways in which opportunities and risks in a project are ranked. They are:
- Evaluating Occurrence Probability (P): This measures the probability of an event and varies between a 1 and 99% range.
- Evaluating Impact Severity (I): The impact levels are mapped along with the severity of each on the company’s performance.
The criticality of each risk level = P x I. The project manager needs to address the critical issues on a priority basis since the project’s success depends on it.
SWOT analysis, decision matrix, and cause and effect diagrams are qualitative risk tools.
Where Do You Apply Qualitative and Quantitative Risk Analysis?
Qualitative Risk Analysis is used in the following situations:
- At the start of a project
- Since the process is quick and cheap, it can be applied at any stage of the project
- If a new risk is identified or the nature of the existing risk changes, this model yields the best results
Quantitative Risk Analysis can be applied in these situations:
- When you have large quantities of data for the risk
- Qualitative Analysis has been applied, but the results require validation
- Since it is time-consuming, it should be used only when the law requires it or the project’s stakeholders want it.
We next discuss the limitations of risk analysis.
Limitations of Risk Analysis in Financial Management
Though risk analysis has its benefits, this method has several limitations. They are:
- Based on Probability: You do not know the exact risk you are facing. All you know are the different kinds of losses you may face
- No Standard Method: You cannot confidently use one method to calculate risk
- Not applicable for Extreme Situations: Risk analysis assumes a normal distribution of risk but does not account for extreme cases like the 2008 financial crisis, where investors lost billions of dollars globally.
In the next section, we will find the best risk management courses for you.
Conclusion
The global risk analytics market is expected to grow from $39.3 billion in 2022 to $70.5 billion in 2027, an annualized growth of 12.4%! To be a part of this lucrative industry, you need to undergo training through top-quality risk management courses.
You can get risk management certification at leading online learning platforms like Hero Vired. Here are some of the highlights of this program:
- Course taught by leading industry faculty.
- Hands-on learning through real-life projects.
- Professional Certificate from Columbia University.
- 70 to 90% live online instructor-led classes.
- Six months course with a 3-month capstone project.
- Learn the valuation of companies and investments.
- Detailed coverage of Modern finance and risk management.
Enroll today and begin your career in the profitable risk analysis industry.