Risk Management
Risk management is the process of identification, analysis, and mitigation of the investment decision-making uncertainty. The risk management happens anytime the investors or fund managers analyze and attempt to count the potential for losses in investments and do the proper action with the risk tolerance and investment objectives. If there is an inadequate risk management then it results to severe consequences both the companies and the individuals. Risk management determines the existing risks in the investments and handles the risks appropriately with the sets of objectives. In addition, risk management is concerned with the preservation of the assets and the earning power of businesses against the risk of loss. As per declared by Michael Yeargin, an insurance broker, “risk management is a philosophy, a way of thinking about potential losses that the smallest businessman can use in looking at his business” .
Most business risks can be classified in four categories; property, market, employee, and customer. As argued by Gary Goldstick, a business management expert, that each type of business risk has its own risk challenges within the business. He cited a retail enterprise that the primary risk is the location of the store. The retail store is a major asset located perfectly at a particular place in town, however; demographics changed over the years, and the store no longer attracts the type of clientele as originally the target in the market. An effective risk management includes excellent risk assessment and risk control. Risk assessment takes place anytime, and risk control is not effective without the previous risk assessment. Correspondingly, people tend to assume that after the risk assessment, they believe that they have performed everything necessary. Many investments ignore risk control after spending great effort on risk assessment. Risk management integrates the recognition of business risks, risk assessment, develop strategies, and mitigate all the categories of risk using sustainable resources.
Business Risk
If companies have a lower profit as anticipated, then the companies experienced loss rather than a better profit. The factors that greatly influenced business risk are per unit price, sales volume, overall economic climate, competition, and government rules, and regulations. The companies with the higher business risk is advice to carefully choose capital structures that engage in lower debt ratios to ensure that the companies can meet the obligations financially. Most investors are exposed to any business risk, financial risk, systematic risk, liquidity risk, country specific risk, and exchange rate risk. Analyst uses simple ratios in calculating risk and incorporates statistical methods.
Property Risk
This is the possibility of loss in financial aspect that occurs as the consequence of unsettled real estate investment, as an example. Property risk arises in things like liability, partnership issues, and legal issues. In a perceptive manner, the risks that threaten the property asset of the organization are essential to ensure protection, growth, and stability. In the business world, the workplace is not only the area that needs some protection, it is necessary that the equipment, building, and stocks be covered to this protection. Property risk refers to the risk events that influence the organization facilities and physical infrastructures.
The risk events that fall in the category of property risk are adverse weather conditions, fires, and terrorist attack. In addition, property risk events have its potential to make general strikes in the business operation and financial material losses. To manage property risk, awareness of the main risk should be anticipated such as the workplace, work process, location of the property, and building security and attractiveness to intruders. Recently, a survey conducted to insurance professionals, risk managers, and property brokers by Advisen Ltd, the provider of solutions and information in the industry of business insurance about how to obtain an excellent level perspective on property risk management. It explains the administered survey to the professionals working in large range of companies and industries.
Market Risk
The investors experience losses due to some factors that influenced the entire performance of the markets financially. The market risk is also known as a systematic risk, diversification cannot eliminate market risk; however, it can be enclosed against the risk. In a major natural disaster, market risk can cause a decline entirely in the market. The sources of the market risk are political turmoil, recessions, terrorist attacks, and changes in interest rates. It is essential for the investors to understand fully all the concepts of market risk. The investors clearly know that their investment involves risks and rewards.
In general, if the risk is higher, the greater the potentiality of reward. It is essential to recognize the risks in the framework of a particular investment or asset. The fact that companies cannot avoid market risks completely, necessary steps need to be utilized to minimize and manage the risks. Mitigate the market risk to the extent through diversification in the product or sector level, region or domestic and foreign level, and the short-and long-term conditions. Through spreading the international risk diversification in the investment in different countries or regions help, mitigate market risk. In addition, learn the other forces that could influence the investment, embrace the global economic trends, and its development.
Employee Risk
Any business ventures are not an easy victory. Everything that the companies have from the financial aspect to compliance is subject to laws implemented. All companies hire employees to aid in different works; however, there is something that owners or managers worry that is the risk management issues happened to the employees like identity theft or involved with the data breach. In the traditional perspective, business or company owners are not concerned with the personal affairs of their employees if it would not affect the job assigned. There is truth behind the old wise saying, “trust, but verify.” Business owners should devote their time in all the operations to determine employee risk and prevent the issues to spread widely. In the end, team disputes, difficult personalities, loss, or illness of key employees, burnout, customer’s service issues, competitive threats, fraud or financial negligence affect the business. These issues are strongly considered as morale killers, and it is unrealistic to eliminate the risks at once and there are vital ways to minimize the risks accordingly.
Some strategies for mitigating those risks are suggested to mitigate the common risk in the employees. First, the Company should be alert to the signs of burnout such as coming late and under time, recurrent illness, apathy, irritability, and the lack of camaraderie. Second, organize a buddy system for the employees to pair up for any urgent projects or works. Third, retain the best employees and ensure to acknowledge, engage, and motivate the employees happily and sincerely. Fourth, balance entry-level employees and interns with professionals that would lead, contribute, and train best practices from experiences respectively. Fifth, appoint leaders to carefully monitor the treatment of company and personal information and conduct some background checks during the hiring period. Sixth, employers should be very observant, employees commit fraud if they are not satisfied on their job, and give appropriate attention to employees living beyond their means or compensation. Last, behavior analysis is necessary to prevent and determine risks in the workplace. Ensure a zero-tolerance policy for unsafe behaviors.
Customer Risk
A relationship with a big customer carries weight beyond the mere financials for small companies . A well-branded and big customer’s relationships assist to influence other people to join and it has advantages in the business. However, there are drawbacks in an over-reliance or customer concentration for small companies. To rely on one big customer would inherent instability in the business. It is very clear to see that big customers are capable of utilizing their size to give good reason in slow payments, renegotiated prices, and some changes in the term of delivery. These situations call for a big attention because small companies would miss the good yearly plan, lay off people, and cut expenses. It would lead to start to track revenue that makes costly receivables than tracking profitable customers.
In solving a customer concentration issues is not simple, and small companies are set up to perform their job with big customers. There are possible ways to cut some customer risks. First, understand the potential customer base and its industry. Clearly, comprehend what factors that causes a customer is not paying his obligation accordingly. Second, insert strategy needed by the customers’ satisfaction and not a mere assumption of having them in the business. If businesspersons build good reputation in the supply chain, then it will create intact relationship with the customers. Third, be careful on the contracts and the length of engagement, as well. The contract and engagements provide excellent opportunities to mitigate the risks. Fourth, as soon as possible, diversify with the customers. Do not limit the relationship only with a single contact or buyer; instead create a multiple champions within the company of the customer that are counted as advocates in general. Last, make sure to give more attention on profitability rather than revenue only. Measuring the profitability of a relationship and the real value created for your business that serves best in the end rather than just be satisfied on revenue with a simple good reason.
Reference
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