The fundamentals of financial risk management: Why it matters in 2025

Every financial institution should understand how important risk management is. It’s not something to take lightly, as the ramifications of poor risk management are likely to be far-reaching and serious. Add to those concerns the realities of increased geopolitical volatility, more stringent ESG regulations, and the ever-present possibility of AI-driven disruptions, and one thing becomes crystal clear: An institution’s commitment to financial risk management needs to be more definitive than ever before.

In the midst of all these changes and uncertainties, however, there’s good news. A shift in mindset can reap huge benefits for businesses that treat risk management as a strategic advantage rather than just a set of compliance standards to navigate.

In this article, we’ll take a closer look at what financial risk management is in 2025. We’ll explore how it works, what strategies are available for businesses to incorporate into their operations, and the role technology will play in its success.

Financial risk management is a systematic, continuous process that safeguards a business’s financial stability. It encompasses an organisation’s strategic ability to manage and monitor things such as credit, liquidity, investments, and regulatory risks to protect against financial vulnerability while also being used as a mechanism for competitive advantage.

It’s also something that individuals must be aware of on a personal level, in terms of monitoring income, savings, and expenses, and managing things such as insurance. It all falls under the umbrella of financial risk management.

It’s important to note that risk management isn’t just about risk elimination; every successful business and investor in the world will take risks at certain points. Rather, it’s about using financial and market analysis to weigh up the risk versus the reward of any financial decision to determine whether it will benefit the business.

Financial risk management is a relatively simple process because it works in a fairly rigid, structural manner. Any decision a business makes that’s directly related to finance will likely go through the same risk management process to determine whether it is an avenue worth pursuing.

Typically speaking, the financial risk management process works as follows:

When a business devises a strategy or initiative, it must first try to identify all possible outcomes and factors that might negatively affect the business if the strategy fails. These are categorised as either qualitative risks (such as reputational damage, geopolitical instability, and regulatory changes or disruption) or quantitative risks (related to credit and liquidity and the results of stress tests and metric simulations).

Once a business has identified the risks, it must analyse each risk in relation to the probability of the risk occurring, its potential impact on the business, and the expected loss. Businesses will then need to prioritise these risks accordingly, with the most severe becoming the main focus.

The business will then look to find ways to counter each risk. This could take the form of either risk avoidance or elimination, risk reduction, risk transfer, or risk retention. Some common strategies to help tackle potential risks include hedging, insurance, and diversification.

Risk levels are constantly changing, so it’s vital to review each risk continuously once mitigation controls are in place to ensure they remain optimal.

In the event that a risk does become more or less probable or serious, all stakeholders should be made aware of any changes to the risk management plan in terms of actions and prioritisation.

Financial risk management can be complex and multi-faceted, as both internal and external factors influence it. Potential risks can come from an array of different sources, so businesses must ensure that any risk management strategies they have in place are broad and flexible.

Let’s look at each of these four sub-sections of risk in a little more detail.

Risks in this category are related to the financial markets as an entire entity, and they’re influenced by macro factors that are mostly out of a business's immediate control. Increased interest rates, for example, can affect a business’s ability to pay back loans that it may have taken out. Geopolitical events can significantly impact commodities and raw material prices, causing reduced supply and increased demand.

Markets can be affected, one way or another, without much warning. That’s why it’s vital for businesses to remain vigilant and adapt their risk management strategies to counter these changes.

Many businesses will allow their customers to take out some form of credit under the condition that they honour their obligations, which sometimes doesn’t happen. If customers are late making payments or default altogether, it can affect cash flow planning. Organisations essentially rely on the goodwill and integrity of others, which can present significant risks.

Liquidity risks are similar to credit risks. Many businesses will take out a line of credit or a loan to help them with short-term expenditures or projects, and they must pay it back over time.

Any business considering this approach must be confident that the project or undertaking will result in enough cash flow to repay the loan; otherwise, it risks not only a downgrade in its credit rating but also other negative, long-term consequences. In the short term, it may not be capable of paying other bills or even employees on time, which could lead to legal consequences.

Operational risks, much like market risks, can be difficult to predict. They are the unforeseen events that affect the day-to-day running of the business. In a broad sense, the pandemic was a large-scale global event that affected every business and put many at huge financial risk.

But a business can encounter smaller, internal issues that have a major impact. Whether an employee with a vital role becomes ill, a team member makes an error in a workflow or a piece of technology malfunctions, the disruption can be significant. Businesses must be aware of these operational risks at all times.

Additionally, there are strategic risks associated with business operations. A business might choose a complete overhaul of its IT or AI infrastructure, which, if it’s implemented incorrectly or the team doesn’t adopt it completely, could have a major negative impact.

Financial risk can be framed in two primary ways, depending on the perspective. Most of what we’ve covered so far is related to enterprise risk. These are the risks that companies focus on to ensure business continuity and compliance.

Investment risks are slightly different. While there is crossover (many businesses will make investments in an attempt to grow and expand), these risks are primarily associated with metrics that can affect a portfolio’s performance and potential returns. Some of the most valuable metrics linked to investment risk include beta (related to the volatility of the market) and alpha (the measure of excess return potential).

Any financial risk has the potential to cause damage to a business. That’s why it’s vital for a business to carry out risk identification and prioritisation to gauge exactly what it’s up against.

Once it has uncovered the risks, it must formulate a set of robust strategies to help mitigate, control or eliminate the risk altogether.

Let’s take a look at some of the most common financial risk strategies that a business can turn to.

This is the process of spreading investments or exposures across several avenues rather than focusing on a single outlet. This helps minimise the overall risk; if one avenue suffers a financial setback, the remaining avenues may be largely unaffected.

In terms of investment, financial management will spread funds across a number of assets such as commodities, stocks and shares, bonds and real estate. A business can also mitigate its financial risks by diversifying revenue streams or supplier bases.

This is where a business uses financial instruments or contracts to help lessen the impact of potential financial losses. It’s essentially achieved by taking some form of action that works in the opposite direction of a primary goal.

For example, a food manufacturer might use a futures contract to lock in a price of certain resources (wheat, corn, etc.) to safeguard against any changes caused by macro influences (geopolitical uncertainty, supply route disruption, inflation, etc).

This is where a company will shift the potential risk onto a third party rather than having to bear the brunt of it directly. Insurance is a common example of risk transfer; the business pays a premium to insurance companies to safeguard against potential legal or operational issues further down the line.

Sometimes risks are unavoidable. They’re a direct by-product of certain business operations that must be undertaken, but the risk is often seen as not serious enough to justify expensive mitigation tactics.

Shoplifting is a persistent risk for retail stores. However, unless a store’s owners want to invest in costly security technologies or lock up their products and diminish overall revenue, they simply have to accept the risk.

This is linked to risk reduction, but in this instance, the business does invest in safeguarding to help minimise the losses.

If a business engages in any form of digital commerce or communication, it is always at risk of a cyberattack. That’s why businesses will invest heavily in cybersecurity to reduce the chances of data breaches.

Sometimes the risks of a new venture are considered too high to proceed with it. They simply outweigh the positives that the venture might yield, so the risk is avoided altogether.

For investors, they might see a potential opportunity as having too many downsides to risk pouring money into. A business might choose not to launch a new product within a highly volatile market.

This can limit opportunities, which is why many consider this a last resort when it comes to financial risk management.

It seems obvious to state that managing the risk associated with your business’s capital is essential for long-term stability. However, many businesses, organisations and investors still overlook this vital defence mechanism and growth opportunity, either through a lack of good information or negligence.

Financial risk management is becoming all the more important in 2025. Rising digital threats such as cybercrime and AI bias are evolving phenomena, and many businesses are still trying to find the best ways of countering these issues. Macroeconomic shifts such as inflation and geopolitical instabilities are more volatile than they have been for many years, so it’s vital to monitor them carefully.

Ever-increasing regulatory conditions and penalties for violations are also considerations in financial risk management. In April 2025 , APRA accepted a Court Enforceable Undertaking (CEU) from ANZ to raise its capital add-on from $750 million to $1 billion. This was primarily associated with ongoing weaknesses in their risk management and risk culture, particularly related to operational risk and compliance.

On a more global scale, Basel IV regulations landed in June; they stipulated the new expectations for banks that are designed to harmonise risk calculation and reduce variability in the outcomes of risk assessments.

All of this is proof that financial risk management should be an essential operation for any business, regardless of size or sector.

Technology is intrinsically linked to all aspects of business in today’s modern world, and financial risk management is no different. With the rise in technological innovations increasing year on year, businesses are now more proactively adopting these technologies to help implement their financial risk management strategies.

Let’s look at some of the most prominent tech programs and applications that are currently being used to improve financial risk management.

Many of the most important modern tech software involve AI in some capacity. Its ability to reduce the number of errors made and to use analytics to arrive at data-driven decisions quickly are key drivers of its success. Predictive modelling can detect early signs of potential market volatility and trends, and machine learning (ML) algorithms and risk models are becoming more refined as they’re exposed to increasing data levels.

At Salesforce, our Financial Services Cloud empowers our customers to make the most of their data, allowing them to make data-driven decisions when conducting risk assessments and determining likely priorities and threats.

Automation has been touted as a key advantage of AI since its inception. And within financial risk management, it can play its part as well with automated early-warning signs for things such as fraud and credit defaults. It can summarise case studies instantly to help stakeholders make vital decisions related to financial risk tolerance and potential rewards.

With Tableau Next from Salesforce, our customers gain instant access to key datasets, automated summaries and personalised insights. Many businesses are taking advantage of this powerful piece of software and seeing great results.

Customer relationship management software is a key component of many business operations. It essentially brings together all forms of financial customer data and maintains it in one location. It also acts as a central hub for a business’s own financial information, making it much easier to monitor and act upon in the event of a financial risk.

Our Agentforce software is the ideal solution for bringing everything together. It integrates with existing CRMs and third-party software to help highlight potential irregularities in customer behaviour and provide potential next steps and actions. It also works seamlessly with our other products to create an enhanced, agentic AI solution for financial risk management.

Enterprise leaders and company managers want things to be as streamlined as possible when it comes to understanding their financial risk management. That’s why many platforms offer intuitive, versatile dashboards to help stakeholders instantly gain access to all of the most important data they require.

This makes it easier to create simulation models that can identify the impacts of things such as inflation spikes and supply chain disruption. These stress tests are vital for companies if they wish to remain vigilant against unexpected downturns.

At Salesforce, we understand how essential financial risk management is to our customers. It’s one reason why we are so focused on ensuring our products and software can help businesses fulfil their operational and legal responsibilities when it comes to managing finances.

RBC Wealth, for example, turned to Salesforce for help with solving a problem many businesses struggle with: siloed data from several sources scattered across the digital landscape. This made it difficult to gather the necessary information for developing a robust financial management risk strategy.

Fortunately, we’re well-versed in handling these types of scenarios. Through consistent consultation and communication, we were able to provide a solution to solve this issue.

Here’s how it all came together:

• Financial Services Cloud: Consolidation of all siloed data into one manageable outlet
• Shield 2.0: Data encryption and security to counter transition vulnerabilities
• MuleSoft: Integration with additional third-party apps to create a holistic approach
• CRM Analytics: Vital data-driven insights to help make strategic decisions

The results soon spoke for themselves, with RBC Wealth reporting:

1. A 50% drop in IT maintenance costs
2. Customer onboarding checks and validation cut down to just 24 minutes
3. Unified 360-degree view for faster decision-making

Additionally, our built-in software infrastructure helped ensure that their financial risk management was robust enough to satisfy all major compliance checks and regulations.