“Risk financing is basically concerned with arrangement of finance to meet with the financial losses which arises due to any unforeseen and unpredictable incident”
Full extent of the potential financial cost should be known before rummaging into different methods of financing. The cost of any unforeseen incident includes monetary, timing and administration costs. Risk incident can therefore be very much damaging to the individual as well as to an organization. So the potential cost involved should be assessed carefully.
Monetary Cost can be very clearly seen by everyone in the organization. When any unexpected event occurs it can cause worst damage to the cash flow, which is required for the proper functioning of the organization. There are some very important assets in the organization which can not be readily replaced after any risky incident occur e.g. machinery, even if funds are made available from any source, and then too it will take months and even years to replace that machinery. If an organization losses its factory premises, then it will take years to construct that premises and day by day the organization will have to bear more losses as its operations will also be ceased.
Time Cost is a huge cost, which is not readily seen by everyone. There is always a relationship between completion of a project or a task. If due to any risk incidents, the project given to the organization is not complete on the decided time, it can hugely cost the organization. As the client can go in court, litigation costs, fines and cost of fulfilling the order from any source can arise. Apart from this, the time wasted during the reconstruction of premises is also very costly, as business will totally be interrupted
Administration Cost is also very high. Any significant incident will divert the management to some other organization. Key personnel will not wait for the re-establishment of the organization; they will search for any other opportunity and will start earning. The situation can even be worse if there are competitors of the organization and they are strongly keeping an eye on the organization’s weakness. They will consider it as an opportunity, and will target the customers and the key employees of the organization suffering from any unforeseen incidents.