CHAPTER 12
PRACTICAL GUIDELINES IN REDUCING AND MANAGING BUSINESS RISKS
Apply the principles and techniques appropriate the situation
Risks can be managed and controlled but success is rare. Hence, the proper and careful risk
management
UNDERSTAND THE NATURE OF RISK
Some companies view risk as an opportunity
Starting point: Accept that risk exist.
Understanding the nature of risk involves assessing the likelihood of risks becoming reality
and the effect they would have if they did.
IDENTIFY AND PRIORITIZE RISK
Identify significant risks both within and outside the organization in order to avoid
unnecessary surprises.
Examples of significant risks: loss of major customer, failure of a key supplier, and
appearance of a significant competitor.
People behave differently and inconsistently when making decisions involving risks.
For a more structured analysis, define the categories into which risks fall.
TYPICAL AREAS OF ORGANIZATIONAL RISK
1. Financial – inefficient cash management, fraud
2. Commercial – poor brand management, market changes
3. Strategic – marketing and pricing decisions, resource allocation decisions
4. Technical – failure of plant equipment, accidental or negligent actions
5. Operational – product or design failure, corporate malpractice
CONSIDER THE ACCEPTABLE LEVEL OF RISKS
Opportunity cost associated with risk: Avoiding a risk may mean avoiding a potentially
big opportunity
Sometimes the greatest risk is to do nothing
UNDERSTAND WHY RISKS BECOME REALITY
Upon identification of risks, they can be ranked according to their potential impact and the
likelihood of their occurrence in order to highlight
a. Where things might go wrong and what their impact would be
b. How, why and where the risk catalyst might be triggered
TYPES OF RISK CATALYSTS
Risk Catalyst are those that can change and trigger risk.
1. Technology – new hardware, software or system configurations, traffic congestion change
introduced by MMDA Chairman
2. Organizational Change – new management structures or reporting lines, new strategies,
commercial agreements like mergers
3. Processes – new products, markets and acquisitions
4. People – hiring new employees, poor succession planning, weak people management,
behavior, laziness, fraud, human error
5. External factors – changes in regulation and political, economic, or social developments,
economic disruption brought by pandemic
APPLY A SIMPLE RISK MANAGEMENT PROCESS
A. Risk Assessment Analysis
- Assessment of risk differs from one company to another. There are risks that can be
solved using past experience and there are also risks that are harder to assess or
quantify. When a company is focused on meeting short-term expectations, risks with
little likelihood of occurrence in the next five years may not be so important to such
company.
B. Risk Management and Control
- Risk management procedures and techniques should be well documented, clearly
communicated, and regularly reviewed and monitored.
Table 1. Assessing and Mapping Risk
- Once the inherent risks in a decision are understood, the priority is to exercise control.
- Share information, prepare and communicate clear guidelines, and establish control
procedures and risk measurement systems.
Avoid and Mitigate Risk
Reduce or eliminate those that result only in costs
It can be achieved through quality assurance programs, environmental and control
processes, health and safety regulations, accident prevention and emergency equipment
installation, and security measures to prevent crime, sabotage, espionage and threats to
people and systems.
Can also be reduced or mitigated by sharing the risk.
Create a Positive Climate for Managing Risk
The ethos of an organization should recognize and reward behavior that manages risk.
Overcome the Fear of Risk
Taking risk is needed to keep ahead of the competition
See risk as an opportunity, not a threat
Risk is both desirable and necessary. It provides opportunities to learn and develop. It also
compels people to improve and effectively meet the challenge of change.
C. Controlling and Monitoring Enterprise Wide Risks
Guide Questions
1. Where are the greatest areas of risk relating to the most significant strategic decision?
2. What level of risk is acceptable for the company to bear?
3. What is the overall level of exposure to risk? Has this been assessed and is it being
actively monitored?
4. What are the cost and benefits of operating effective risk management controls?
5. Do employees resent risk, or are they encouraged to view certain risks as opportunities?
PRACTICAL CONSIDERATIONS IN MANAGING AND REDUCING FINANCIAL RISKS
Finance is the lifeblood of a business. It heavily influences strategies and decisions at every level.
1. Improving Profitability
a. Variance Analysis – interpreting the differences between actual and planned
performance
b. Assessment of Market Entry and Exit Barriers – assessment of how easy or difficult it is
to either enter or leave a market
When markets are difficult or costly for competitors to enter and relatively easy and
affordable to leave, firms can achieve high, stable returns, while still being able to leave
for other opportunities.
c. Break-even Analysis – cost-volume profit analysis, analysis of the point when sales
cover costs or where neither profit or loss is made
d. Controlling Costs – achieved by focusing on the big items of expenditure, being aware of
costs, maintaining a balance between costs and quality, using budgets for dynamic
financial management, developing a positive attitude to budgeting, eliminating waste.
Practical Techniques to Improve Profitability
- Focus decision making on the most profitable areas
- Decide how to treat the least profitable products
- Make sure new products enhance overall profitability
- Manage development and production decisions
- Set the buying policy
- Consider how to create greater value from existing customers and product to
enhance profitability.
- Consider how to increase profitability by managing people.
2. Avoiding pitfalls in making financial decisions – achieved by applying the following
principles
a. Financial expertise must be widely available
b. Consider the impact of financial decisions
c. Avoid weak budgetary control
d. Understand the impact of cash flow
e. Know where the risk lies
3. Reducing Financial Risk
Guide Questions:
a. Are the most effective and relevant performance measures in place to monitor and
assess the effectiveness of financial decisions?
b. Is there a positive attitude to budgets and budgeting?
c. What are the least profitable parts of the organization? How will they improve?
d. How efficiently is cash managed? Do your strategic business decisions take account of
cash considerations, such as time value of money?
