Wednesday, 15 July 2015

Managing Risks

All business activities carry an element of risk inherented in them; this business activities include financial activities, operating activities, marketing activities and activities that involves dealing with employees. It is important you determine risk at an early stage of your business. The risk appetite of your business should determine the risk management approaches that will be used. Risk appetite is the risk a business is willing to take to achieve its goals. The business must have the capacity to deal with the consequences  of the taking the risks and it must be acknowledged by all major contributors.

The risk appetite must reflects your business plans and strategies. I mentioned business activities earlier now I am going to give you some examples of risks for  each activity. Financial activities include  financial forecast that are not accurate, cost estimates that are not accurate, adverse changes in tax rates etc. Marketing activities include decrease in demand for products (good and services), a new major entrant into the market, changes in the taste of customers, the introdution of a more competitive product by competitors etc. Operating activities include problem with suppliers, difficulties with information systems etc. Activities that involves dealing with people include recruiting and retaining employees etc. 

After risks have been identified you must now assess the risk which involves assessing the probability of the risk occurring (whether its low, medium or high) and assessing the impact of its occurrence on the business (whether its low, medium or high). You should use the risk appetite of the business to determine what class (high, medium or low) the probability of risks falls into and the impact it will have on the company. Both quantitative and qualitative measures should be used, quantitative measures may include financial targets or earning volatility, qualitative aspect may include reputational impact and legislation compliance. Dealing with risks involves four main approaches which includes

* Avoidance: If in the opinion of your business the probability of the risk occuring is high and the impact on your business is also high then the risk should be avoided. That means you should eliminate all factors that will lead to the occurrence of such risks.

* Reduction/Mitigation : If in the opinion of your business the probability of the risk occurring is high but the impact on your business is low then the risk should be reduced/mitigates. You identify ways to mitigate or reduce the risks.

* Transfering risks: If in the opinion of your business the probability of the risk occurring is low but the impact  is high then the risks should be transferred which can be done by means of insurance, through business contracts with suppliers, customers, employees etc

* Absorbing risks: If  your business believes the probability of the risk occurring is low and the impact is low then the risk should be accepted since the consequences of its occurrence can be easily dealt with.
You should review the risk management approaches used by your business regularly, cause a potentially low risk might become high due to changes. You should also measure risk management approaches against key performance indicators. Keep checking this blog for more finance and business tools. Cheers!

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