Interest rate and credit risk are most common; agricultural commodity and market risk most significant.

If the economic upheaval of the past year and a half has taught us anything, it’s that risk isn’t something to be taken lightly. A survey of more than 200 corporate finance execs conducted by AFP in November 2009 shows which financial risks are most common across many organizations, as well as those that are most significant. Interestingly, some risks that were relatively less common nonetheless could have a significant impact on those organizations that had to deal with them. The survey also delved into the tools organizations are using to manage financial risks.

Interest rate risk was the most common, with more than four in five respondents reporting some exposure to it. Not surprising when you consider that commercial paper rates for nonfinancial companies have fallen from about 5 percent in early 2007 to near zero today.

On the other hand, while almost all companies have to manage this risk, only 11 percent of respondents said that it could have a significant impact on their organization’s profitability. In fact, for 38 percent of respondents, the potential impact was either not significant or was only minimally significant. Nearly three-quarters of respondents use over-the-counter swaps to handle interest rate risk.

In comparison, just 13 percent of survey participants said that their organizations are exposed to agricultural commodity risk. For these companies, however, the risk tends to be significant. Eighty percent indicated that fluctuating energy prices could have a significant or very significant impact on their firms’ profitability. Treasurers and CFOs called on a range of tools to manage this exposure, with 47 percent using physical forwards. Another 47 percent build their inventory, and 27 percent use over-the-counter forwards.

Respondents’ top goals in managing almost every financial risk were to reduce variability in cash flow and earnings. Similarly, most had two primary criteria when it came to choosing the tools, such as forwards and options, that they used to manage these risks: the costs of the instruments and senior management’s familiarity with them.

The exceptions to this were the tools used to manage liquidity and market risk. Both were fairly common and significant risks. Nearly two-thirds (64 percent) of respondents indicated that their organizations were exposed to liquidity risk; of those, 53 percent rated the potential impact as significant. Companies took a range of actions to manage liquidity risk; among them were maintaining high cash balances, improving their cash flow forecasting abilities, and diversifying their funding sources.

Market risk was an issue for slightly more than half of survey participants, with nearly two-thirds (64 percent) saying that it could have a significant impact on profits. To manage against this, companies looked at expanding their markets, customers, and product offerings.

Because this is the first survey on financial risk that AFP has conducted, it’s not possible to see how responses have changed over the past few years. However, the survey results make clear the importance financial executives are placing on risk. For at least some organizations, this focus is separating those that are thriving from those that are struggling. ###