Frontiers in Business, Economics and Management 
ISSN: 2766-824X | Vol. 16, No. 1, 2024 

 

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Study on the Causes and Countermeasures of 
Enterprise Financial Risk 

Lina Sha *, Guanlin Liu 

Graduate University of Mongolia, Ulaanbaatar, Mongolia 

* Corresponding author: Lina Sha (Email: qk03041217@163.com) 

 

Abstract: In the environment of fierce competition, the financial security of enterprises becomes extremely important. 
Enterprise financial security is a key issue in enterprise operation, which directly affects the survival and development of an 

enterprise. Therefore, enterprises should always pay attention to their financial situation, improve risk awareness, and establish 

a sound financial risk prevention system. Business management should take appropriate action to respond to changing domestic 

and international trends. This paper analyzes the financial risk of the company, and studies preventive measures according to the 

analysis results to reduce the financial risk of the company and improve the market competitiveness of the company in the 

challenging competitive environment, so as to provide guarantee for the sustainable development of the company. 

Keywords: Financial risk, Causes of financial risk, Risk control. 

 

1. Financial Risk Theory Basis 

1.1. Financial Risk Concept 

Corporate financial risk refers to the impact of 

unforeseeable or uncontrollable factors on corporate finance 

that occur in the process of production and operation. The 

reason for the company's loss is that the company's financial 

situation is uncertain. The financial risks of enterprises are 

objective and cannot be eliminated. The only way to mitigate 

a company's financial risk is for management to specify 

appropriate control systems and reduce the impact of financial 

risk on the company. There are two main reasons for the 

formation of financial risk, one is the financial risk caused by 

external factors, and the other is the financial risk caused by 

internal reasons. 

1.2. Financial Risk Characteristics 

As a type of risk, financial risk has the common 

characteristics of risk, but also has its unique attributes. As 

shown in Figure 1.1, the characteristics of financial risk 

mainly include four characteristics: objectivity, 

comprehensiveness, uncertainty and co-existence of profit 

and loss. 

First, objectivity, risk exists everywhere, always exist. 

Financial risk is not transferred by people's will, people can 

not avoid it, can not eliminate it, only through various 

technical means to deal with the risk, and then avoid the risk; 

Second, comprehensive, financial risks exist in every link 

of enterprise financial management, and financial risks will 

be generated in financial activities such as fund raising, fund 

application, fund accumulation and fund distribution. 

The third is uncertainty. Financial risks may or may not 

occur under certain conditions and in a certain period of time. 

The fourth is the co-existence of income and loss, the risk 

is proportional to the return, the greater the risk, the higher the 

return, on the contrary, the lower the risk, the lower the return. 

1.3. Classification of Financial Risks 

Financial risk is basically divided into five aspects: 

financing risk, investment risk, operating risk, inventory 

management risk and liquidity risk. 

Financing risk refers to one of the financial risks of the 

company is the potential solvency loss and the change of the 

company's earnings (shareholders' income) due to the 

issuance of bonds. 

Investment risk refers to the risk that investors bear in order 

to achieve investment objectives and cause losses or 

bankruptcy in future transactions and financial activities. 

Business risk refers to the phenomenon of low economic 

benefits caused by changes in the external environment and 

insufficient adaptability of economic entities to the 

environment in the business activities of enterprises, which is 

called business risk. 

Inventory management risk means that it is crucial for an 

enterprise to maintain a certain amount of inventory for its 

normal production, but how to determine the optimal 

inventory is a thorny problem. Too much inventory will lead 

to overstock of products, occupy enterprise funds and lead to 

high risk. Too little inventory may lead to the untimely supply 

of raw materials, affecting the normal production of the 

enterprise, and in serious cases may cause the default of 

customers and affect the credibility of the enterprise. 

Liquidity risk refers to the possibility that corporate assets 

cannot transfer cash normally and definitively or corporate 

debts and cash payment obligations cannot be performed 

normally. In this sense, the liquidity risk of enterprises can be 

analyzed and evaluated from the two aspects of liquidity and 

solvency of enterprises. Due to the enterprise's ability to pay 

and repay the debt, the problem is called cash shortage and 

cash insolvency risk. The problem that occurs when an 

enterprise's assets cannot be transferred to cash with certainty 

is called liquidity risk. 

1.4. Financial Risk Management Process 

Manage the company's financial risk through a sound 

management process, which consists of 5 steps: 

The first step is to gather initial risk management 

information. The first collection of information requires a 

comprehensive collection of all data about the company's 



 

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risks and risk management. Specific responsibility for the 

collection of initial information should be assigned to relevant 

functional departments and business units. 

The second step is risk assessment. Risk assessment 

consists of three stages: risk identification, risk analysis and 

risk assessment. A large number of qualitative and 

quantitative scientific methods can be introduced into the risk 

assessment process. Enterprises must implement the dynamic 

management of risk management information. 

The third step is to develop a risk management strategy. 

When formulating risk management strategy, the company 

must first unify the preference and risk tolerance according to 

the business characteristics, determine the risk warning line, 

and comprehensively consider the allocation principle of 

human and financial resources required for risk management. 

Finally, corresponding countermeasures should be taken. 

The fourth step is to propose and implement a risk 

management solution. The company should develop a risk 

management solution for multiple risks or each major risk in 

accordance with its risk management strategy, and specify the 

specific elements that the plan should typically include. 

The fifth step is the supervision and improvement of risk 

management. Enterprises should focus on major risks, major 

events and major decisions, major management and business 

processes, monitor the implementation of risk management 

processes, and apply various methods to verify the 

effectiveness of risk management. 

2. Cause Analysis of Enterprise 
Financial Risk 

2.1. Analysis of Causes of Financing Risk 

2.1.1. Unreasonable debt structure 
In recent years, the total liabilities of some enterprises are 

mainly current liabilities, which are too dependent on several 

financing channels, resulting in a single debt structure and 

lack of flexibility. When the market environment or policy 

environment changes, the company will face financing 

difficulties or rising costs, which will affect the rationality of 

the company's debt structure. 

2.1.2. The solvency fluctuates 
In recent years, the current ratio, quick ratio, asset-liability 

ratio and cash ratio of some enterprises have fluctuated to 

varying degrees, which is caused by the impact of the novel 

coronavirus epidemic and the unreasonable structure of their 

own debt. During the COVID-19 pandemic, factory 

shutdowns and export disruptions have caused problems in 

some industries, while some companies have relied on short-

term borrowing for a long time, ignoring the increased risk of 

their own short-term liabilities and weakened long-term 

solvency. These problems will make the company in the face 

of market competition and economic risks can not effectively 

deal with, and then affect the stability of the debt structure. 

2.2. Analysis of the Causes of Investment Risk 
- Mismatch Between Foreign Investment 

and Income 

Some companies over-invest in a product or service, and 

the market demand does not meet expectations, resulting in 

poor sales and cash flow cannot cover the investment 

expenditure. At the same time, due to changes in the market 

environment, the expected return and cash flow of the project 

will have a negative impact, as well as the decline in 

consumer demand, the decline in demand, the intensification 

of competition among enterprises or policy adjustments, and 

other factors will lead to the project return is not as expected, 

and then affect the mismatch of cash flow. 

2.3. Cause Analysis of Business Risk - 
Inventory Overhang 

Some enterprises inventory backlog is mainly due to two 

reasons, first, due to the rise of global trade protectionism in 

recent years, resulting in the export of products in some 

industries facing tariffs, technology, security and other 

barriers, which has brought certain challenges to the 

development of the industry. 

Secondly, since the outbreak of the novel coronavirus 

epidemic in 2019, the global economy has been hit, and the 

epidemic has caused a huge impact on the global economy. 

The impact of the epidemic has led to a decline in market 

demand in some industries, and the inventory overstocking of 

some enterprises has increased their inventory costs and 

management difficulties. 

3. Enterprise Financial Risk 
Prevention Measures 

3.1. Suggestions on Financing Risk Prevention 
and Control 

3.1.1. Reasonable planning of debt structure 
Enterprises should actively explore and experiment with 

bank loans, equity financing, supply chain financing and other 

financing channels. Companies can reduce their reliance on a 

single funding model and reduce the financial risk associated 

with channel-specific issues. At the same time, management 

needs to actively establish good relationships with various 

financial institutions who understand the guidelines and 

financing needs of various financial institutions in order to 

quickly obtain funding support when needed. At the same 

time, cooperation with financial institutions can improve 

financing efficiency and reduce financing costs. 

3.1.2. Preventing the impact of the post-epidemic era 
In the post-epidemic era, national policies have a huge 

impact on the economic environment, and enterprises should 

set up special economic and policy research teams to 

regularly track the national economic situation and policy 

changes, and timely understand the relevant information of 

national economic policies in the post-epidemic era, so as to 

make response strategies in advance. 

At the same time, enterprises can strengthen 

communication and cooperation with the government, 

understand the trend of national policies and implementation 

rules, strive for policy support and resource tilt, and reduce 

the financial risks caused by policy changes. 

3.1.3. Pay attention to the international political and 
economic situation 

Enterprises need to pay close attention to the international 

political and economic situation, understand the changes in 

the international market and international trade policies, in 

order to timely adjust business strategies and financial 

management, and reduce the financial risks brought about by 

changes in the international situation. 



 

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3.2. Investment Risk Prevention and Control 
Suggestions 

3.2.1. Prevent the impact of mismatch between 
investment decision and market demand 

When enterprise management makes investment, it is 

necessary to analyze the consumer demand of the target 

market, such as demand size, growth potential and demand 

characteristics. According to the company's own resources 

and capabilities, develop investment strategies and product 

plans suitable for different types of needs. 

At the same time, it is necessary to establish an efficient 

and good customer feedback mechanism to collect and 

analyze the feedback of customers who purchase the 

company's products in a timely manner. Adjust investment 

strategy and product planning based on customer feedback to 

ensure that it keeps pace with market needs. 

3.2.2. Prevent the impact of changes in the market 
environment 

First of all, enterprises should strengthen market analysis 

and forecasting, pay close attention to the dynamic changes 

in the home appliance market, including consumer demand, 

competitor conditions, raw material prices, etc., in order to 

adjust investment strategies in a timely manner and reduce 

market risks. 

Secondly, according to changes in the market environment, 

flexibly adjust the company's strategic direction, product 

positioning and business model to adapt to new market 

demands and competitive trends. Maintain organizational 

flexibility to respond quickly to market changes. 

Finally, it is to collaborate with other companies, 

institutions or organizations to jointly address the challenges 

brought about by market changes. Through cooperation and 

exchange of resources and industry information, interests 

complement each other and market risks are reduced. 

3.3. Suggestions on Business Risk Prevention 
and Control 

3.3.1. Pay close attention to the economic situation 
Nowadays, the world integration pattern is further 

improved, and the business conditions of enterprises are 

closely related to the international political and economic 

situation. Managers need to pay close attention to the changes 

in the international political and economic situation, 

especially to understand the changes in the international 

market and international trade policies, so as to timely adjust 

the business strategy and financial management strategy and 

reduce the financial risks brought by the changes in the 

international situation. 

At the same time, enterprises need to implement a 

diversified market strategy, open up markets in multiple 

countries and regions, and reduce their dependence on a 

single market. This can effectively disperse market risks and 

improve the company's market adaptability and anti-risk 

ability. 

Finally, enterprises need to strengthen exchanges and 

cooperation with international partners, understand the needs 

and trends of the international market, learn from 

international advanced risk management experience and 

financial management concepts, and improve their own 

internationalization level and risk response ability. 

3.3.2. Develop diversified sales channels 
Due to the inventory backlog caused by the epidemic, 

enterprise management needs to develop product sales 

channels to sell the backlog products in the warehouse. 

Nowadays, the rapid development of e-commerce platforms 

brings opportunities to enterprises. Enterprises should expand 

online sales channels, expand the sales network through live 

streaming and short video promotion, and plan targeted 

promotional activities to stimulate consumers' desire to buy. 

To speed up inventory turnover. 

4. Summarize 

Based on the systematic theoretical knowledge system in the 

field of financial risk research, this paper first introduces the 

background and basic financial status of the enterprise, and 

then establishes three different levels for the identification 

and analysis of corporate financial risk, which are: financing, 

investment and operation. The analysis found that: 

First of all, its financing method is single, and the financial 

structure is unreasonable, mainly short-term borrowing. And 

the company has a large fluctuation in the current ratio and 

quick ratio. This indicates that the company's ability to pay its 

debts in the short term is weak. 

Secondly, in terms of investment risk, the enterprise has the 

following problems: the amount of foreign investment 

expenditure of the company continues to increase, but the 

income generated by the invested projects is not high, which 

affects the operation of the enterprise. 

Thirdly, its inventory increased year by year, and the 

inventory backlog of enterprises was serious. Lead to 

insufficient warehouse space, increase inventory costs and 

management difficulties. 

Finally, enterprises are greatly affected by external factors, 

whether it is the change of international environment or 

domestic economic environment, it will affect the 

development of enterprises. 

Acknowledgments 

Thank you. 

Disclosure statement 

The authors, Lina Sha, Guanlin Liu, jointly declare that 

there are no conflicts of interest that could potentially 

influence the impartiality or objectivity of the research 

presented in this paper. We confirm that throughout the 

processes of manuscript preparation, data collection, analysis, 

interpretation, and publication, there were no conflicts of 

interest. Each author, independent of any commercial or 

financial interests, is committed to ensuring the scientific 

integrity and transparency of the research. We uphold the 

principles of academic honesty and are dedicated to 

maintaining the values and standards of the academic 

community. 

Author contributions 

Lina Sha made significant contributions to the 

conceptualization, data analysis, and writing of the paper. 

Guanlin Liu provided key insights in methodology, and 

contributed to the writing of parts of the paper. Each author 

contributed importantly to the work and approved the final 

version of the manuscript. Lina Sha, as the corresponding 



 

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author, was responsible for overseeing the overall direction of 

the project. Each author contributed importantly to the work 

and approved the final version of the manuscript. 

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