Question

You have been selected as the consultant on a risk-related project for a client. The Chief Risk Officer has asked you to prepare notes on common risk management techniques for business continuity and planning for future projects.

In your initial post, answer these questions.

1. How does each technique affect the overall profitability of a company?
2. Why is risk identification important to a company? Explain how it factors into the company’s capital budgeting process.

Answer 1

Risk management Techniques for Business continuity and Planning:

Risk management is a mos difficult part as it affects Business continuity and planning for the business projects. If Risk is not identified and mitigate in proper way and at proper time then it will affect directly on the Business and its continuity.

So, first step is to identify the Risk and its impact on Business.

Following are some common risk management techniques for business continuity and Planning for future projects and its effect on the overall profitability of a company:

1. Creating a different site for work in case of disaster:

In such technique the whole site or business unit is created to recover from disaster and risk involve in it. There is another work place or site created to continue the Business process in case of any disaster or in Huge risky situation. Some techniques are Cold site and Hot site.

In this technique work place is created as:

1. To equip the machines, tools required in day to day business on such site

2. Update these machines as per recent data with some past record backup

3. Plan the shifting of Business in such site in case of Disaster or Risk

Impact on Profitability : It involves Huge cost to create the same infrastructure also it involves lot of time to create such site which affects time value of money to the company.

2. Contingency Plan :

In such technique there is plan made for the situation when contingency is there. It is an immediate plan for in case of contingency. In this plan the resources are saved as much as possible. It handles major high risks of the Business.

Impact on Profitability : Even if it is a short plan and resolves for the contingencies it affects the Business operations which impacts the lower profitability.

3. Analyse and identify the different Risk and Disastrous situations and prepared for such risks:

In this technique the possible risks are analyse and separate it as per their impact on the business. Then prepare the plan for risk mitigation and recovery.

For example for Earthquake install earthquake resistance system. For fire it install the fire extinguisher in the company.

Impact on Profitability : In this risk is known and impact of the risk identified but actual impact of such risk is unknown, Hence, it affects directly to the profitability as to mitigate such risk organisations resources are used. If risks are not mitigate properly then it impacts lower profitability or in some cases loss.

Why is risk identification important to a company?

Risk identification is important to company because It involves affects Huge amount of money, resources, time, Human resource etc. Which affects the operations and continuity of Business. If risks are not found properly and in time then such risks are difficult to mitigate and it affects the continuity of the business. If risk mitigation plan is ready then business operations can continue in such situations.

Explain how it factors into the company’s capital budgeting process:

It affects company’s capital budgeting process as it involves money, time, resources of the company.

Following are the factors affected by risks of Business continuity and planning on the company’s capital budgeting process:

1. Determination of Internal Rate of Return:

As it involves huge funds the internal rate of return will lower down as cost to the company will be more and profitability lower due to impact of risks on the business. It also affects the exposure of profit to the investors and its preferences to invest in the organisation due to profitability impact on Business operations

2. Time value of money:

It involves huge time. For example if earthquake happens and the whole site will destroys in the earthquake then in such case the shifting of resources will be time consuming also the opportunity cost will be lost due to such mitigating the risks. It affects overall Time value to the Organisation.

3. Huge initial investment with unknown inflow :

To prepare such plan for risk mitigation involves huge initial investment. And in such case it is difficult to know the actual impact of such risks. In capital budgeting these decisions are made by projecting the cash inflows. But in this situation the inflows are unknown and hence it is difficult to predict the actual viability of such investment to the company.