Risk Management

What is a risk?

A circumstance or factor that may have a significant negative impact on the operations or profitability of a given business.

It may be internal or external.

State some types of risks.

1. Financial risks- e.g. cash flow problems

2. Production risks- e.g. breakdown of machinery

3. Human resources- e.g. strikes

4. Product- e.g. faulty or dangerous products could lead to recalls.

5. Legal risks

Give some examples of risks a business may face.

• Natural disasters

• Failure of equipment

• Employee error

• Supply problems

• Changes to the economy

• Changes in legal environment

What is an uninsurable risk?

A risk that an insurance company cannot calculate the probability of the risk and cannot work out a premium that the business must pay.

Give examples of insurable risks a business may have.

• Theft

• Burglary

• Fire

• Vehicles

Give examples of uninsurable risks a business may have.

• Shoplifting during trading hours

• Financial loss due to bad management

• War

What is a quantifiable risk?

A risk which can be measured.

Examples:

• Financial Risk – The probability that a major customer becomes bankrupt and does not pay money owed to a supplier

• Operational Risk – The breakdown of key equipment or machinery

• Strategic Risk – A new competitor coming on to the market

What is an unquantifiable risk?

A risk that cannot be measured.

Examples:

• The adverse effect on the business’ reputation if there is a major failure in quality control or if a major brand has to be withdrawn because it is affected by a health scare.

• Market rejection of one of its new proposed brands.

• The effect of external factors, such as a recession.

• The impact of rapid expansion on staff morale

What is risk management?

Risk management is the process of understanding and minimising what might go wrong in an organisation.

What does the risk management process involve?

• The identification and analysis of risks to which the organisation is exposed.

• A measurement of the likelihood of the risks occurring.

• An assessment of potential impacts on the business.

• Deciding what action can be taken to eliminate or reduce risk.

Give examples of preventative actions businesses can take in order to minimise risk.

• Regular backup of IT systems

• Robust quality control systems

• Training employees to deal with anticipated problems

• Holding spare stock

• Avoid reliance on a single supplier / customer

What is contingency planning?

A plan devised for an outcome other than in the usual (expected) plan.

It is often used for risk management when an exceptional risk that, though unlikely, would have catastrophic consequences.

What is the aim of having a contingency plan?

To minimise the impact of an unforeseeable event and to plan for how the business will resume normal operations after the event.

Give examples of contingency planning.

• Fire practices

• Keeping back up copies of data from computers

What are the benefits of contingency planning?

A business will be prepared for any eventuality that may occur- can save time and money in the long run.

What are the drawbacks of contingency planning?

• Time-consuming

• Unexpected events may still occur, since it is virtually impossible to plan for every possible outcome

What is crisis management?

Crisis management involves how a business responds to an unforeseen event that threatens the business.

Examples of crisis: hostile takeover, environmental disaster, terrorist attacks.