Risk Management Explained

Risk Management Explained

The dynamic environment of the modern world, business is exposed to risks of all kinds. While managing a business, one has to take a holistic view of all the aspects, and it is important to know all the risks that you may be facing.

Risk-management is the process of identifying these risks and planning how to deal with them. The first step in risk-management is to identify, and define the risks you think will be faced in the future. The next step is to analyse the impact of those risks on your business, and prioritise them accordingly. Those risks, which have a larger impact, should be dealt with first. Finally, risk-management includes planning how to counter those risks, so that they do not adversely affect your business, and then taking those necessary steps.

There are many ways to manage loss. The first is through risk avoidance. This means that you avoid that activity, or that process that exposes you to the particular risk. Although this eliminates your exposure to the risk, it can also make you miss certain opportunities to make a profit. Thus, it is not a solution for all kinds of risks.

Another way to manage risk is through risk reduction. Risk reduction means following those steps, which can reduce the impact of loss, or help control it. One way to reduce loss is to outsource one, or more of your business functions to a third party who is expert at handling them. For example, many companies outsource their information technology systems to other firms, so that they do not have to deal with the risks associated with them.

Loss retention is also one of the processes of risk-management. It sometimes happens that the risks involved are unavoidable, and essential for the business. Risks are part of a business, and it is not possible to eliminate risks from your environment. Thus, some risks must be retained, especially if their impact is not that large.

Lastly, loss transfer is one of the most common methods of risk-management. This involves transferring your risk to a third party through insurance. Many types of risks can be insured against such as vehicle accidents, theft and fire hazards. In this way, if you are exposed to a certain risk, your insurer will pay for it.

There are many areas of risk-management. One of the most common is financial risk-management. Financial risk is one that is faced by every kind of business, and is one that can play a major role in the success of your business. Thus, it is important to have proper financial risk-management systems in place. A more holistic approach is Enterprise Risk-Management, which takes into accounts the risks associated with all departments, and functions of a business.

Before deciding on the risk management method, it is important to analyse the risk from all points of view. However, it is essential to realise that loss are a part of business, and some exposure to risks is necessary.

Corporate Risk

Rethinking Corporate Risk

An important staple in corporate affairs management lies not only in the intricacies of the external environment and its potential impacts – deleterious or favorable – on firm profitability but also in factors endogenous to the entity. A business entity has to panoramically gauge in permanence all elements that are part of its ‘quality chain’, that is, its supply chain and distribution channels taken in conjunction with its corporate brand rating within the market.

Uncertainty is at the heart of every business venture. The adventure of a venture is what epitomizes every undertaking that has profit seeking as its core ethos. Decision-makers are keen not only to seek the best ingredients for strategic success but to derive systemically the most cost-efficient modus operandi that will perennially heighten overall financial competitiveness and shareholder value.

Uncertainty can be viewed as the inherent dichotomy that exists in day-to-day decisions regarding core utility and chance; in other words, uncertainty is the big question mark that hangs on the shoulders of most corporate executives, asking them whether they’re making good decisions and whether these decisions will yield good outcomes.

Good outcomes are vital to immediate, short-term firm success in the marketplace; however, good decisions are preeminent in the long-run strategic standing of most corporations because a framework that structurally fosters the emergence of the best ideas and the most efficient and effective procedures uniquely positions these entities for a relatively perennial competitive dominance.

The current risk literature emphasizes that risk, that is, the unknown from uncertainty, can be construed in two ways: aleatory and epistemic. Aleatory risk refers to a situation of pure chance whereas epistemic risk is a conflict circumstance where the resolution depends on the experience level of the decision-maker and their judgment. The latter risk is customarily encountered in business dealings but the former is more a product of probability. For instance, Tony Merna and Faisal F. Al-Thani (2008, page 14) qualified the discovery of Viagra as aleatory because the drug was originally for angina but was found during clinical trials that it could be used to prevent erectile dysfunction syndromes in males.

Corporate risk officers need to continually devise a structured framework to systemically address risk at all levels of the strategic continuum, be it at the executive and project levels or lower echelons. Uncertainty is an indissoluble nexus in business; therefore, risk can never be integrally eradicated. This heightens considerably the criticality of a sound mode of operation that places due interest on the detection, the analysis and the mitigation of all risks across the firm.

Diverse risks but a single risk management framework

Many types of risk are found in business entities nowadays, both exogenously and endogenously, depending on the economic sector, the market situation and position (monopoly vs. oligopoly, monopsony vs. oligopsony, or perfect competition) and the strategic direction corporate executives are disposed to spearhead.

To a majority of corporate leaders, the conventional risk typology addresses three key areas which are quintessential to business processes, firm profitability and monetary viability: operational, market and credit. These risk areas were redefined and enhanced through the Basel II banking regulation although the precepts of the latter regulatory corpus can be applied effectively to any business sector.

Operational risk lies in the execution of a company’s business functions and thus covers an incredibly large span of functions, from internal processes to human resources and IT systems. An example of such risk may be a theft of information or a loss due to internal fraud (asset misappropriation).

Credit risk refers to the unfavorable event when a debtor is unable to repay a loan or other line of credit due to bankruptcy or temporary liquidity problems (the epithet “country risk” is preferred when the defaulting party is a country or any other sovereign entity).

Market risk is the risk that market factors (stock prices, interest rates, foreign exchange rates, and commodity prices) may have individually or communally an unfavorable pecuniary effect on a corporate investment or trading portfolio.

Another risk – political risk – is present within a firm’s external environment and emerges concomitantly with a move into the international sphere. This relates to the financial peril that a country may suddenly change its policies and explains, in part, why many underdeveloped countries lack foreign direct investment.

Managing new types of risks

Admitting that risks are inherently the Achilles’ heel in most corporate functions makes accordingly easier the argument that an effective risk management program is pivotal to avoiding potential financial losses or brand damage. Ri

Improving Risk Management

Improving Risk Management

Previously I have written about management and its risks and how best to categorise it through your business to ensure your risk management system is thorough and relevant to requirements of the business. Risk Management is all about what risks the business owner or management will take into the business, which of these will be insured against, and which risks will be managed or eliminated. Underpinning sound risk management systems is the willingness to embrace a positive and open attitude to asking (or being asked) tough and confronting questions. To assist with this process I have put together some ways you can assess or improve your internal systems.

Management risk is a value add
It is not a separate process – Integrate it into your decision making processes
It is a tool to help implement your business strategies
Ask what you need to get right to successfully manage your business and achieve your goals

Establish your business and personal priorities

Set the risk thresholds for your corporate and operational strategies
Clear priorities mould your organisation’s culture and its attitude towards the business stakeholders
Incorporate measurement of the businesses risk profile at regular Director / Senior Management meetings
Decide you your business risk appetite

Establish the type and level of risk your business will carry
Communicate this to the relevant senior management within the business
Reconsider the Company’s risk appetite in conjunction with changes in the business environment
Ask questions constantly

Probe Company management regarding business performance and management in conjunction with each other
Questioning highlights the desire to be proactive towards risk management
Be open minded when asking questions and receiving the responses
Integration of risk management

High business performance and good risk management to have same emphasis
Consider risk management implications to current and new business activities
Management reports to include risk management report as well as all other activity and performance reports
Use all information sources

Get all levels of the workforce to provide information on potential risks
Talk to external stakeholders such as auditors, financiers, key customers and suppliers
Robust risk assessment can also uncover hidden opportunities to improve your business
Allocation priorities to identified risks

Identify major risks and work on these first (e.g. WHSE&T, excess debt)
Accept that you cannot manage all risks facing the business at one time
Understand the risk management processes for each of the major risks and report regularly
Risk benchmarks and indicators

Use the Company audit reports (internal and / or external reports)
Indicator information come from financial data, customer / supplier communication and scanning the business environment
Align the reporting process to the agreed indicators
Use lead and lag indicators
Use software tools to assist in risk identification, management, reporting and review

Risk management structure

Match the structure to business size and complexity
Appoint one person or small group of people to be responsible for structure, operations, effectiveness, reporting and review
Challenge management, management activities and Director activity
Have a clear agenda and policy for risk management.


Entrepreneurialism – At Risk!

Weak of heart people, this article is not for you! Because Entrepreneurialism is a risk taking in business and it is for those people who can walk through the various risk and difficulties for getting an incredible amount of gratification. And knowing that they did not waste their time on something useless but they have done a work which will benefit their family as well. It depends how much benefit they are giving to the customer by the products.

There is something like satisfaction which comes with entrepreneurialism. You are an embodiment entrepreneur if you get creative in solving the problems efficiently and immediately on the difficult roads of entrepreneurialism. The problems may be new and unknown to you and not all of your decisions will be perfect but the way you response to problems is what matters and that’s the creativity the job requires.

If you have decided to operate a business for the first time knowing the risks as well….and even then you decide to pursue it you are the right man! Determination is the key quality of a good entrepreneur. And it is good to take a risk rather than dreaming the whole life and building castles in the air.

So always make a plan and stay determined on it but prepare yourself for the worst! You should be able to make wise decision within time because no time management means a lost case – money loves speed. There will be many opportunities; you just have to grasp them as fast as you can.

Before you start with the entrepreneurialism, take guidance from someone already established and learn from their experiences. Do not worry – time will teach you all the lessons and you will excel! Start your work now and give your ideas so your mentor can guide you about what’s good and what’s bad for business. Your entrepreneur skills just need to be polished. Trust within yourself and go for it because life is also at risk even then you go around happily – why not the business risking too?

Managing Business Risks

Managing Business Risks

I have a certain way I think about businesses. When we’re talking about business risks, there is no reason to go into a business with risk, with any risk but your time. That is somewhat controversial, because people look at businesses to have some sort of risk. It comes down to that they are risky if you don’t do your proper research. You have to ask yourself, why are you doing business online? It’s easier to do and the research stats are all at your finger tips. You can find out about a business so much before you risk one red cent.

Trading systems are interesting too. You can back test a lot before putting your money into the market. The way you do things is the way you do things. With trading systems, it’s all about how much money you will have come in at the end of the day as a direct result of your trading system. It’s no different than gambling, because you have to have a system for each in order to be successful.

At the moment I get to actually putting my money into it, I make a plan. You might not have the right structure for it, but at least you know that. What I do know is that for a system to be truly tested, you have to test it in the heat of the marketplace. That goes for any market you talk about, trading, gambling etc.

It’s the basic example of someone that I know who was a crafty guy that did a great deal of banner advertisement in his particular niche. We were talking about hot traffic trends. It’s funny because I remember doing all this stuff in the past, so it was like taking a trip back into time. He did really well in what he did, but it’s a game that you have to play with using your own money. It’s not the same as free traffic. You have a certain amount of money to play with in your business.

This is what we are working with. I’ll be paying X amount of dollars over the course of a year. I would obtain Y amount of impressions. It really looks like a good deal. It also helped that it was a PR 7 website and he even got a link back to his own website. It looked like a good deal all around.

This is what I said to him. This looks good on paper, so why not write them and ask them for a free trial. We would sign up for 12 months where we’d have a one month option to try it out and if we didn’t like the results we could cancel our plan. They never went for the deal we made, but there is no sense in not trying to ask. That is how you get to certain levels in business. It’s all about taking business risks in stride.

Business Risks at the Workplace

How to Identify High Business Risks at the Workplace?

Risk management at the workplace is a daily challenge for managers working in any organization. Risks can be serious like potential fire in your plant/factory and embezzlement by senior management staff of the company or minor like employees using company time to conduct their own personal matters. In this article, we will discuss on how to identify high business risks at the workplace that we as managers, need to be mindful of.

To manage risks, we must first identify the risks that can potentially happen at the workplace. Risks are basically some events that may occur in the future and cause negative business impacts to the organization. To identify risks particularly those with high negative impacts to the company, we utilize the knowledge and experience of our experienced employees who operate the business processes, plant/factory equipments or units. This can be effectively carried out through structured brainstorming or facilitation. The facilitator given the responsibility in carrying out this assignment is someone who should be competent in the facilitation process. In addition, he/she must have the ability to manage the participants in the brainstorming session, especially the participants who are senior management staff.

I remembered an occasion when I was given the assignment to facilitate a group discussion which was attended by a Chief Executive Officer and several Senior General Managers. The Chief Executive Officer did not want to participate at the initial stage of the group discussion. I had a feeling that he was trying to evaluate whether I knew what I was doing. To overcome his resistance, I had to explain patiently to him on the process during the course of obtaining inputs from the other members of the group. As soon as he was convinced that the process was working and he was not wasting his time, I could not keep up with him as he was providing some excellent ideas at a very fast pace.

In a typical brainstorming session, the group can easily identify many risks that can happen in the organization. It will be quite impossible to manage the hundreds of business risks identified. Consequently, we need to prioritize the business risks identified. Prioritization involves managing business risks which have High Seriousness when they happen. What are these risks? We can consider risks with High Seriousness if the risks have negative implications on plant production, Health Safety & Environment, compliance to laws & regulations and the company image.

The other criterion in risk prioritization is to identify the likelihood or probability of the business risks happening. Will the business risks happen? Are existing preventive plans put in place by the organization, sufficient and effective? A good example would be business risk of “Late Delivery of a critical equipment” required for a new plant. If this critical equipment is delivered late, it will have serious consequences in affecting the completion of the new plant, thus impacting the planned production resulting in business loss. One of the preventive actions of minimizing the likelihood of this risk happening which has been adopted by my company, is to have a Liquidated and Ascertained Damages (LAD) clause in the contract with the equipment supplier.

The objective assessment of the risks identified, the seriousness and the likelihood of the risks happening, can then be captured in a Risk Map. The Risk Map is then used as the main reference for managing high business risks in the organization.

Business Risk

Wisdom in Addressing Business Risk

At some point, owners of businesses face the question of risk. Risk is inherent in almost everything we do in this fallen world in which we live. Those seeking small business advice will do well to consider business risk and its effect, because in addressing our potential to fail we can minimize the likelihood of such failure. However, stalling over the presence of risk can be as deadly as ignoring risks. It is the balanced approach that wins.

Ecclesiastes of the Bible says, in verse 4 of the 11th chapter: “He who watches the wind will not sow and he who looks at the clouds will not reap.”

The immensely wise author of Ecclesiastes, Solomon, understood well the creation of enterprise. He evidenced matchless wisdom and intelligence, and his kingdom was known around the world for unprecedented extravagance and grandeur. He had built bigger, better, and farther than anyone before his time. Kings and queens travelled across the globe to witness the magnitude of his great wealth and what he had accomplished with it.

But even amidst all his success, Solomon still could apply his mind to the simplest, core truths. And there, in the eleventh chapter, he did exactly that when he spoke of sowing and reaping, the most basic of life supporting work: the planting of seed and the harvesting of its fruit.

In the agrarian culture in which he lived, Solomon wisely took his readers back to the core enterprise in alluding to farming. And in his simple illustration he spoke of a monumental truth that could be aptly applied to all business over the entire world: If you consider the risks too heavily, you will never enjoy the benefits of taking on those risks.

When a farmer went out to sow his seed, and he needed his limited supply of seed to land on the fertile soil, wind was not a welcome helper. The wind would blow the seed around, causing some to fall on rocky or hard or fallow ground. Likewise, the darkened clouds promised trouble when he was headed out to harvest his crops. The downpour would make it difficult to access the ripe plants, it would make the pathways treacherous, and dampness on his bagged produce could introduce mold.

The farmer knew these risks. He understood the problems. But those risks could not keep him from his necessary work, and the resulting problems could not keep him from bringing food home to his family.

I believe the risk principle Solomon spoke of is appropriate for all business people in every business endeavor. Whether one builds a skyscraper in the metropolis or sets up a flower stand on a country road, there will be risks. The evaluation of those risks and the approach to those risks is often what separates the doers from the wishers.

Anyone can plan to sell a product. Anyone can plan to build a building. Anyone can prepare to begin a new venture. But only the successful entrepreneurs turn the plan, with the risks, into action.

This principle of taking calculated business risks is one which, I believe, if learned well, can benefit business owners in many ways. Business risk is inherent. It is unavoidable. And it must be evaluated and qualified. But if risk creates fear and anxiety and unproductiveness, and it kills opportunity in the mind of the entrepreneur, it becomes the enemy. The bold and adventurous entrepreneur sees the risks, and takes precautions, but he doesn’t let the possibility of failure quash his passion. Risk strengthens his passion, because he then becomes more creative, more aggressive, and more prepared.