Question

Define business risk and explain its two dimensions.

Describe the steps in the risk management process in small firms.

Discuss the many types of risk in a business such as shoplifting (both internal and external), and theft, name some more.

Answer 1

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Define business risk and explain its two dimensions.

Business risk

It is the risk that poses a challenge for the going concern assumption behind conducting a business. These risks result in unforeseen losses and uncertainity in profits, there by resulting in the business to fail.Example is ban on Maggi noodles in India a product of Nestle, due to failing of the regulatory standards for lead content in the food.As a result of this, Nestle had to stop selling Maggi in India, and call back all the unsold stock back into its godowns and immediately stop selling the product.Business risk means the chance of losses connected to the assets and the earning potential of a business. It means more than just assets listed on a balance sheet, it includes those things plus employees, customers, and reputation are at risk of loss.

The two most frequently used dimensions of risk are as follows:

• Probability of occurrence of risk.

• The impact of risk, if it is realized.

These dimensions can be shown in a simple low-to-high continuum with the help of a marker board or flip chart. The risk can be assessed at any point in the continuum.

Describe the steps in the risk management process in small firms.

A Risk Management Process usually involves the following steps –

(i) Risk Identification:

• There can be many sources and types of risk and they have to be identified properly. But here a note of caution is there since element of subjectivity is involved as risk is a perception.
• One needs to formulate Project Risk Register for the purpose.
• Brainstorming Sessions may also be utilized.

(ii) Risk Analysis:

• One has to find out the probability of occurrence of each risk and the potential consequences in the event of its occurrence.
• Both quantitative (like Range, Mean Absolute Deviation, Variance and others) and qualitative approaches may be employed for the same.
• Past experience with similar types of projects can be helpful.

(iii) Risk Evaluation:

• One has to estimate the magnitude of each risk and then decide whether the risk needs to be treated.
• Risks may be ranked in the Risk Register to achieve this objective.

(iv) Risk Treatment:

• One needs to deal with the risks that are ranked higher. These are the more serious risks.
• One may go for risk mitigation like avoiding (going for a less risky alternative), transferring (outsourcing to an external organization), leveraging out (reducing fixed cost) or managing (using Project Status Reports, Milestones, Budgets etc).
• One may also have to carry out contingency planning to take care of extreme risks.

(v) Risk Monitoring and Reviewing:

• One has to scrutinize and review the different types of risks.
• One may use the Project Risk Register for this purpose.
• One has to find out why some risks are recurring and how the risks are affecting organization’s resources.

Discuss the many types of risk in a business such as shoplifting (both internal and external), and theft, name some more.

The types of risks faced by businesses are

• Strategic risk: it involves the advent of a new competition in the market
• Compliance risk: it involves a firms response to new safety and health legislation
• Financial risk: it involves non-payment on the part of a customer or increased interests payments made mandatory on loans acquired by the firm.
• Operational risk: it involves the probability of burglary or the possible breakdown of chief equipment of the firm
• Environmental risk: it involves the possibility of natural hazards
• Commercial risks: it involved the possible failure of main suppliers of the firm or the customers of the firm.
• Employee risk: it involves the maintenance of at least the minimum staff to meet the requirement of the firm. It also includes aspects of employee safety and Environmental risk.
• Political and economic instability risk: it involves the possibility of disruption in business operations due to any political or economic unrest or fluctuation.
• Risks are not always obvious as it is difficult to foresee event and in some cases they are not at all predictable. Some of these risks are Political and economic instability risk
• Risks to suppliers involve the possible failure of the supply of goods and inputs required to continue business operations of the firm. In the case of small businesses the firms do not have sufficient funds to insulate themselves in the case of a temporary failure and are more susceptible.

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