Unit 8: RISK MANAGEMENT

BUSINESS
RISK
 What is Business Risk?
Business risk refers to a threat to the
company’s ability to achieve its
financial goals. In business, a risk
means that a company’s or an
organization’s plans may not turn
out as originally planned or that it
may not meet its target.
 What is Business Risk?
Such risks cannot always be blamed on
the owner of the company, as risk can be
influenced by various external factors,
which may include rising prices of raw
materials for production, growing
competition, and even changes and
additions to existing regulations set by the
government.
 What is Business Risk?
While a company may not be able to
shelter itself from risk completely, there
are ways it can help protect itself from
the effects of business risk, primarily by
adopting a risk management
strategy.
UNDERSTANDING
BUSINESS RISK
Unit 8: Kimberlee Sta. Ana
 Understanding
Business Risk
 Business risk is associated with the overall
operation of a business entity. These are things
that impair its ability to provide investors and
stakeholders with adequate returns. For
example, a business manager may make certain
decisions that affect its profits or he may not
anticipate certain events in the future, causing
the business to incur losses or fail.
 Understanding
Business Risk
 Business risk is influenced by a number of
different factors including:
• Consumer preferences, demand, and sales
volumes
• Per-unit price and input costs
• Competition
• The overall economic climate
• Government regulations
Understanding
Business Risk
The company is also exposed
to financial risk, liquidity risk,
systematic risk, exchange-rate risk,
and country-specific risk. These
make it increasingly important to
minimize business risk.
 Understanding
Business Risk
A company with a higher amount of business risk
should choose a capital structure with a lower
debt ratio to ensure it can meet its financial
obligations at all times. When revenues drop, the
company may not be able to service its debt,
which may lead to bankruptcy. On the other hand,
when revenues increase, it experiences larger
profits and is able to keep up with its obligations.
Types of Business
Risks
Unit 8: Jhoylyn Pentojo
 1. Strategic Risk:

Strategic risks can occur at any time.

Strategic risk arises when a business does
not operate according to the business
model or plan. A company's strategy
becomes less effective over time and it
struggles to reach its defined goals.
 2. Compliance Risk

Compliance risk involves companies

having to comply with new rules that
are set by the government or by any
other governing body. This arises in
industries and sectors which are highly
regulated with laws.
 3. Operational Risk

Operational risk occurs within the

business’ system or processes. This risk
arises from within the corporation—
when the day-to-day operations of
a company fail to perform.
 4. Financial Risk
Financial risk is about the financial health of
the company. Can the company afford to
offer installment payments to its customers?
How many customers can it offer such an
installment scheme? Can it handle business
operations when two or three of these
customers are not able to make their
payments on time?
CAUSES OF BUSINESS RISK
UNIT 8: Elaiza Laureen Jamili
1. NATURAL CAUSES

•Natural causes of risk include

flooding, earthquakes, cyclones,
and other natural disasters
that can lead to the loss of
lives and property.
2. HUMAN CAUSES

•Human causes of risk refer

to negligence at work,
strikes, work stoppages,
and mismanagement.
•
3. ECONOMIC CAUSES

•Economic causes involve rising

prices of raw materials and
minimum wage, rising interest
rates for borrowing, and
competition.
 Business Insurance: insure
against basic risks
UNIT 8: JOHN JEE JAMORE
 Types of Insurance to Consider:

All-risks buildings and contents insurance protects against a range of risks,

such as fire, flood and theft. The right level of cover is likely to depend on
whether you own or lease your premises and the value of your buildings
and contents.
Equipment can be insured for the cost of replacing an item or its current
worth, taking wear and tear into account. You can also get policies to
protect machinery and IT equipment against breakdown.
Business interruption or business continuity insurance compensates you
for costs incurred and loss of profits after a disaster such as fire or flooding
or an IT system failure.
 Types of Insurance to
Consider:
Goods in transit cover protects the value of goods lost or damaged when
in your vehicle or sent by a carrier.
Credit insurance covers you against the risk of debtors becoming
insolvent. But you'll need to bear part of the risk yourself.
Legal expenses insurance covers the costs - such as solicitors' fees and
court costs - of defending a legal action.
Fidelity insurance protects against losses caused by dishonesty or theft by
staff.
 Types of Insurance to Consider
Money policies cover cash, cheques and stamps.
Different levels of cover apply depending on
whether money is on your premises, in safes or
transit.
Travel insurance will be required if you or your
employees travel abroad on business.
 OTHER TYPES OF
BUSINESS RISKS:
• 1. Reputational and Publicity Risks - Loss of a company’s reputation
or community standing might result from product failures, lawsuits or
negative publicity. Reputations take time to build but can be lost in a day.
In this era of social networking, a negative Twitter posting by a customer
can reduce earnings overnight. A negative blog post or a bad product
review can occasionally spread like wildfire online, quickly thrusting a
company into damage-control mode.
• 2. Competitive Risk – The risk that your competition will gain
advantage over you that prevent you from reaching your goals.
 OTHER TYPES OF BUSINESS RISK:
3. Innovation Risk – risk that applies to innovative
areas of your business such as product research.
4. Quality Risk – the potential that you will fail to
meet your quality goals for your products, services
and business practices.
5. Credit Risk – risk that those who owe you
money fails to pay or also known as accounts
receivable risk.
OTHER TYPES OF RISK:

Link:
[Link]
com/new/business-
risk
H O W T O C A L C U L AT E T H E
I M PA C T A N D
PROBABILITY OF
BUSINESS RISK?.
U N I T 8 : K I M B E R L E E S TA . A N A
STRATEGIC RISK SEVERITY
MATRIX:
• Business Risks\Calculation of [Link]

[Link]
impact-and-probability/
To know more about this, go to the link above.
 SCORING:
• A score is determined by the product
(multiplication) of the two numbers. This
number is associated with a 5-level scoring
result (Controlled, Serious, Disruptive, Severe,
or Critical).
 SCORING:
• Here are all the possible results:

• Controlled (a score of 1 to 2) — Limited monitoring only

• Serious (a score of 3 to 6) — Active monitoring
• Disruptive (a score of 8 to 9) — Investigation needed
• Severe (a score of 10 to 16) — Rapid action is required
• Critical (a score of 20 to 25) — Immediate, crucial priority
6 STEPS IN USING
THE MATRIX:
UNIT 8: Kimberlee Sta. Ana
 First,
consider your problem from a big-picture
perspective.
 Take a few steps back, and pretend that you’re an
observer who is not emotionally tied to the situation.
 Isolate the main problem.
 State it as simply as possible.

STEP 1: STEP BACK AND USE LOGIC

Let’s say you own a seafood restaurant, and
you notice a sudden drop in the number of
customers. Upon reviewing your numbers, it is
clear that several customers have decided to
stop buying at your store.

EXAMPLE:
First:
know whether this is a significant
problem or one that can just be
monitored.
State the problem logically. (how?)

HOW TO ADDRESS THE ISSUE:

 Make a financial analysis if this problem has affected your sale or
not, or will continue to affect your sale in the future.
 Then choose an impact score.
1: Negligible — Risks have minimal damage or long-term effect
(the lowest Impact)
2: Marginal — Risks may cause minor loss but little overall effect
3: Serious — Risks may cause considerable loss, injury, or
damage
4: Major — Risks will cause significant loss, injury, or damage
5: Catastrophic — Risks will cause extensive damage and long-
term effect (the highest Impact)

STEP 2: SELECT AN IMPACT

SCORE
Afterthe evaluation, the seafood restaurant
business found out that the risk has caused
considerable loss to the profit of the
business.
So they gave it 3 as an impact score.

3: Serious — Risks may cause

considerable loss, injury, or damage

EXAMPLE:
 You need to look at the chance of this happening again.
 Find out the cause of this risk.
 Is it:
1: Unlikely — Not expected to occur (the lowest Probability)
2: Remote — Not expected, but possible
3: Occasional — May occur intermittently
4: Certain — Expected to occur eventually
5: Frequent — Likely to occur soon and often (the highest
Probability)

STEP 3: SELECT A PROBABILITY

SCORE
The owner of the seafood restaurant business found out
that the risk was because of the “red tide and oil spill
news,” last month.
Since it is likely to occur soon and often, in the
following months they have rate it…
5: Frequent — Likely to occur soon and often (the highest
Probability)

EXAMPLE:
Now we take the Impact Score of 3
and the Probability Score of 5 and
multiply them:
3 x 5 = 15
Then check it on the MATRIX.
STEP 4: MULTIPLY THE SCORES AND
EVALUATE THE RESULTS
 problem:
FACTS:
1. Gelatissimo Icecream Corner, after reviewing their financial report, found out
that there profit goes down for more than 60% compared to last month’s
financial report.
2. After observing for a week in their shop, the owner have noticed the following:
– The customers entering the shop was lessened by 40%.
- There is a newly opened Ice cream parlor shop just 10 meters away from their store.
- Their products were not anymore attractive to the customer because of the new
trends.
- 6 out of their 10 icecream products are not earning profits because according to
product research, these are cliché and ordinary looking products.
You are task to analyze the risk of your
business. How will you make a risk
management strategy?
1. What is the cause of risk in the Gelatissimo Icecream Parlor?
2. What is the type of risk?
3. From the “LaConte’s Strategic Risk Severity Matrix,” how will
you rate the impact of the risk to the business?
4. How about the Probability?
5. What is the overall scoring?
CALCULATE THE RISK:
 ANSWERS:
1. ECONOMIC CAUSES.
2. STRATEGIC RISK/ COMPETITIVE RISK.
3. 5 – Major because it is already affecting the company at a large
rate.
4. 5 – Frequent because this will be affecting the company for the
next months if not addressed.
5. 25- Critical (Immediate action required).
AFTER CALCULATING THE RISK, TREAT
THE RISK TO YOUR BUSINESS
Unit 8: John Jee Jamore
 OPTION A:
Avoid the risk
- If it's possible, you may decide not to
proceed with an activity that is likely to generate
risk. Alternatively, you may think of another way
to reach the same outcome that doesn't involve
the same risks. This could involve changing your
processes, equipment or materials.
 OPTION B:
 Reduce the risk
-You can reduce a risk by:
reducing the likelihood of the risk happening - for example,
through quality control processes, auditing, compliance with
legislation, staff training, regular maintenance or a change in
procedures
reducing the impact if the risk occurs - for example, through
emergency procedures, off site data backup, minimizing
exposure to sources of risk, or using public relations.
 OPTION C:
 Transfer the risk
-You may be able to shift some or all of the responsibility for the risk to another
party through insurance, outsourcing, joint ventures or partnerships. You may also be
able to transfer risk by:
cross-training staff so that more than one person knows how to do a certain task and
you don't risk losing essential skills or knowledge if something happens to one of your
staff members
identifying alternative suppliers in case your usual supplier is unable to deliver
keeping old equipment (after it is replaced) and practicing doing things manually in
case your computer networks or other equipment can't be used.
 OPTION D:
Accept the risk
-You may accept a risk if it can't be avoided,
reduced or transferred. Other risks may be extremely
unlikely and therefore too impractical or expensive to
treat. However, you will need to develop an incident
response plan and a recovery plan to help you deal
with the consequences of the risk if it occurs.
 PROBLEM CONTINUATION…

–How will you treat the risk of Gelatissimo

Icecream Parlor?
– What ways can you think to help
Gelatissimo Icecream Parlor solve their
problem?
 AFTER TREATING THE RISK, REVIEW AND
ASSESS ALWAYS YOUR MANAGEMENT
PLAN.
• Monitor and review
- You should regularly monitor and
review your risk management plan and
ensure the control measures and insurance
cover is adequate. Discuss your risk
management plan with your insurer to
check your coverage.
RECAP AND SUMMARY:
STEPS ON HOW TO MAKE A
RISK MANAGEMENT PLAN
ALL GROUP MEMBERS
 1st step: Identify the Risk.

• Evaluate each function in your business and identify anything

that could have a negative impact on your business.
• Review your records such as safety incidents or complaints to
identify previous issues.
• Consider any external risks that could impact on your
business.
• Brainstorm with your staff.
2nd step: Assess the Risk

•the likelihood (frequency) of

it occurring
•the consequence (impact) if
it occurred
 3rd step: Manage the Risk
•avoiding
•reducing
•transferring
•accepting.
 4th step: Monitor and Review

•You should regularly monitor

and review your risk
management plan and ensure
the control measures and
insurance cover is adequate.
 Tips:
• Brainstorm with your partners or people.
• Always communicate this to people who
are experts in the field of finance,
operations, management and insurance,
etc.
• Share ideas and be open to accept ideas
from others.
• Innovate plans according to trends.
LINKS USED IN THIS REPORT:
• Business Risks Definition, Cause and Types:
[Link]
[Link]
• Calculating Business Risk: [Link]
probability/
• Insurance: [Link]
• Risk Management Plan: [Link]
business/risk-management/preparing-plan/treat
[Link]
management
Report Presentation End
THANK YOU!