Effects of financial risk management strategies on the performance of horticulture firms

Abstract

Financial risk management can help horticulture firms to stabilize cash flows, reduce the risk of insolvency, manage taxes better, and focus more effectively on their primary businesses. Effective risk management allows corporations to weather difficult situations and be able to survive the fallout of any losses or scandals. The objective of financial risk management is to reduce chances of a vulnerable situation such as variability of the net cash flows and the inability to meet prior claims on the business with the cash generated by the firm, while achieving the highest possible returns for the shareholders. The inability of the management to identify, measure, prioritize, treat and monitor risks that affect horticulture business on a timely basis is the key challenge which the management needs to address. The study reviewed literature on evolution of financial risk management to trace the origin of risk management and determine financial risk management strategies used to manage risk. A detailed analysis of sources and financial risk management strategies utilized by horticulture firms were examined to evaluate their effectiveness in minimizing the variability of net cashflows to farmers. Empirical studies that focus on effects of financial risk management strategies were reviewed to establish those strategies which influence performance and value of horticulture firm. Studies on risk management reforms and practices in horticulture business were reviewed to evaluate their effects in reducing cash flow variability. Five key findings emerge from the study. Firstly, horticulture firms employ a range of financial risk management strategies that include insurance, hedging, and diversification and the use of commodity linked bonds to enhance firm's performance since there is no single strategy which can be utilized to manage all horticulture risks. Secondly, Literature review indicates that a number of authors have adopted risk management process models that have, three, five or seven steps. However, these varied steps can be summarized as risk identification, assessment, prioritization, monitoring and control. Thirdly, horticulture firms that adopt and implement financial risk management strategies improve their performance in terms of increased sales, earnings, profit and market share. The improvement in firm performance is attained particularly when there is strategic fit and alignment between entrepreneurial culture, organizational strategy, management styles and various contextual factors. Fourthly, most of the existing risk management models are not appropriately aligned to the unique, dynamic and risky conditions related to horticulture farming and business. Lastly, the impact of the growth of exports of cut flowers on the performance of horticulture firms in developing countries has not received much attention from researchers.