India’s small business owners must know how to deal with market risks. Market risks are hard to predict, and if businesses don’t have the right plans to deal with them, they could lose money in ways they didn’t expect.
Market risk is the chance that a business investment will lose money because of changed stock prices, interest rates, or foreign exchange rates. Learning how to mitigate market risk effectively is crucial for small business owners who want to maintain security and long-term success. In this blog post, we shall explain market risk meaning and various ways for small business owners to overcome it.
What is Market Risk?
Market risk meaning is when a company’s exposure to possible financial losses brought on by changes in the market. Small businesses must be ready to deal with several different types of market risk. These comprise equity market risk, interest rate risk, and currency risk. Businesses can protect themselves from losing money by using effective risk management methods that consider these types of risks.
The number of MSMEs that closed to date is 49,342, the biggest number of closures in ten years. This shows how hard it is for small and medium-sized businesses to manage risks appropriately.
Also Read – 5 Common Differences Between Subsidiary Company and Holding Company
Proven Ways To Overcome Market Risk
Let’s take a look at 8+ proven ways that can help MSMEs mitigate market risk:
1)Diversify Investment and Revenue Streams
Diversification is a tried-and-true method of reducing market risk. This means putting money into several different areas instead of counting on one source of income.
By getting money from different sources, businesses can balance losses in one area with wins in another, lowering their total risk exposure. For example, if a store lets customers shop both in-store and online, it is better protected from changes in the market that affect one channel.
2)Use Financial Hedging Instruments
One of the best ways to deal with market risk in risk management is to balance their risks. This means businesses can protect themselves against changes in the value of currency or the prices of goods by trading.
Financial hedging is something that many Indian businesses that buy or sell do. It helps them deal with changes in the value of the dollar better by coming into a forward contract or any other such contract.
For instance, by utilizing advance contracts, an Indian business may get a set exchange rate for the dollar while buying machinery from the US. If the rupee drops in value before the payment is due, it can save losses. This safeguards profit margins and guarantees predictable expenses.
3)Stay Informed About Market Trends and Data
One of the easiest ways to deal with market risk is by staying aware. Small business owners should monitor economic changes, industry trends, and policy changes that could affect their businesses. If you are an MSME then you must be aware about the latest trends in MSME sector.
Businesses can predict changes and be ready for them by looking at market information daily. India’s National Statistical Office (NSO) gives information and facts about the market. They give businesses helpful information that can help them spot new risks.
4)Keep Emergency Fund
Businesses can use a backup fund to protect their finances if they lose money due to market risk. Small businesses should put some of their income into an emergency fund that they can use when they are having trouble paying their bills.
The Emergency Credit Line Guarantee Scheme (ECLGS) of the Indian government has helped almost 1.2 crore MSMEs. This shows how important it is to have extra money in case of a crisis.
5)Invest in Digital Transformation
As the world moves more and more toward digitalization, companies can better handle market risk by adopting technology. By using digital tools like Slack, Trello, QuickBooks, etc., small businesses can improve their working efficiency, lower their extra costs, and better predict market demands.
To make businesses less dependent on traditional markets, cloud-based platforms, Artificial Intelligence in predictive analytics, and e-commerce options are all useful. For example, small stores that use e-commerce sites have grown their customer base and possible income.
6)Use Insurance to Cover Specific Market Risks
Businesses can protect themselves from possible losses caused by market risk events by getting insurance. However, some plans, like business interruption insurance, can help make up for losses caused by events beyond the company’s control.
Besides that, trade credit insurance protects small businesses against the risk that customers won’t pay, a common problem for Indian MSMEs.
7)Practice Scenario Analysis for Measure Risk
Businesses can use scenario analysis to imagine different economic situations and determine how they would affect their operations. Using scenario analysis, Business owners can determine the possible changes in interest rates, currency values, or stock prices that might affect their operations.
An essential part of market risk management is doing case analysis regularly. It gives business owners the information they need to prepare for different market trends.
8)Build Strong Relationships with Financial Institutions
Small business owners who want to protect their finances must work with reputable banks and other financial companies. Businesses can get credit lines by building strong relations with banks or other non-banking financial institutions.
It helps them meet their short-term cash flow needs. Businesses can quickly get the money they need to mitigate market risk if they keep their credit score high and build relationships with lenders.
9)Adopt a Flexible Pricing Strategy
Businesses can handle changes in the cost of raw materials or other costs caused by equity market risk better if they have a flexible price strategy. For example, suppose the cost of importing goods increases and leads to loss for a small business, they can pass on some of the costs to customers and stay competitive if they have a flexible price system.
Businesses can control risk with this approach without sacrificing their profit margins.
Conclusion
For small and medium-sized businesses, facing financial problems, handling market risk requires strategic planning and easy access to financing choices. As a source of financial solutions, Indifi helps by giving quick and personalized financing choices. This can help companies that need to fill short-term cash flow gaps, invest in growth possibilities, or set up emergency funds. Contact us today to manage risks while ensuring your financial stability.
FAQs
- What effects does global risk have on Indian small businesses?
Global risk can create trouble in supply lines, increase prices, and make products harder to find, especially for companies that depend on importing or exporting goods. It can reduce their profits and ability to keep their business running.
- Can you give a prime example of market risk affecting a small business?
When fabric prices go up because of problems in the supply chain, it’s a market risk for clothing stores. This makes it more expensive to produce textile products, which would reduce the profits if prices remain the same.
- Can market risks have an impact on a company’s credit score?
Yes, not managing market risks can cause financial instability. This can hurt a company’s cash flow and possibly lower its credit rating, which makes it harder to get loans in the future.