Business Risk (uncertainty as to loss in business) pervades the entire enterprise, and its scientific management is indispensable to success in the industrialized economy. Many failures in business can be traced to failure to recognize or deal with risk. Many business managers have a natural tendency to emphasize the profit aspect of enterprise while regarding risk management as less important. Business Training in Kenya has more topics.
Risk aspects of the enterprise may be examined under the following major headings: (1) property and personnel, (2) marketing, (3) finance, (4) personnel and production, and (5) environment.
Types of business risk
Property and Personnel Risks
Losses may be direct or indirect; for example, a physical peril may destroy property outright, causing direct loss, or the loss may take the form of reduced income from business interruption, stemming indirectly from the occurrence of some peril. Such risks are often handled through insurance, but other methods of handling them are also employed.
Marketing has been defined as all of those business activities necessary to move goods from producer to consumer. It does not generally include the production of the goods themselves. The major functions include such activities as buying, selling, transportation, and storage. Activities such as standardization and supplying market information and research also are important collateral functions of marketing activities. Some specific examples for illustrative purposes follow.
Buying and Selling: Many risks are taken by the business firm in the buying and selling functions. A seller may not be able to sell inventories of goods, thus suffering unexpected price markdowns. Sources of such price risks include changes in consumer style preferences, shifts in the fashion cycle, unexpected weather conditions, inability to hire competent sales personnel, ineffective advertising appeals, inability to extend sufficiently favorable credit terms, poor service by distributors, or international events.
Other examples of risk characterizing the buying and selling function are: Improper identification of the class of consumers (market segment) or competition, lack of knowledge of the attitudes of the buying consumer for which a product is designed, consequent financial losses from improper advertising and promotion and other selling effort, selection of marketing channels constitutes an important risk of loss in the buying and selling function.
The failure rate characterizing new products is known to be very high, perhaps as high as 90 percent, due to the difficulties and uncertainties in gaining initial market acceptance. Sellers have misjudged consumers’ mental attitude toward uncertainty and failed to use devices such as product guarantees as a way to overcome buyer resistance, particularly in some types of sales such as those made by telephone or by mail order.
Transportation: Transportation is a major activity in marketing. It ensures that goods are moved closer to the final consumer. There are many risks that could be associated with this activity. Examples include goods may be stolen, damaged, or destroyed in transit, goods may be confiscated by others, such as foreign agencies in the case of international sales, legal disputes over salvage may cause unexpected losses to the shipper, the seller may become liable for freight charges even though goods are not delivered, delays in shipping may cause loss through spoilage or because of reductions in market price before the goods can be delivered, Unexpected losses may occur because actions by foreign governments prohibit the importation of goods already shipped.
Storage: Improper facilities for storage may cause unexpected losses. Normal perils such as fire, explosion, and other perils producing pure risks subject the goods to loss. Unexpected delays in removing goods from storage may cause loss from unusual storage charges. Forgery of warehouse receipts representing goods in storage may result in unexpected crime loss. Owners of storage facilities may suffer unexpected loss due to the nature of goods stored.
Information and Standardization:
Failure to have correct market information is an important source of risk in the marketing function. Obviously, the entering of new markets without prior knowledge of consumer attitudes, acceptable prices, expected sales levels, and type of products in demand greatly increase risk of failure of the product or service to be sold. The cost of obtaining sound market information and research must be considered in the price of risk reduction and weighed against potential gains.
Standardization of parts also may be viewed as a risk reduction device. Standard sizing greatly facilitates mass production and distribution and reduces Line cost to the consumer. It minimizes tile risk of unsold parts inventories. The mass output it makes possible through lower prices has a similar effect.
Most firms depend on credit to conduct their operations. Losses may arise both from credit received as well as credit extended. Banks may call or fail to renew loans due to deteriorating business conditions, thus causing financial setbacks in the firm due to curtailed operations.
Unexpected increases in interest costs may reduce profits.
Insolvency of customers is another source of financial loss. In some cases, particularly when the firm greatly depends on a few large customers, insolvency of any one of which would threaten the firm’s own solvency.
Financial risk exists in such decisions as to the type of securities employed in providing funds for the business firm,
Employment of self-insurance funds,
Arranging bank financing.
If the firm is making investments in stocks and bonds, such investments obviously carry some degree of risk. This risk can be assessed by objective measurements of standard deviation in dividend returns, market price fluctuations, earnings per share of common stock, or other more sophisticated statistical measures.It will be the task of management to decide upon both the degree of risk acceptable at each given level of expected return in a given portfolio.
The business firm is confronted constantly by potential loss to personnel through such risks as:-
1. Death or disability of its personnel. Management decisions in the area of personnel involve considerable risk which often is not explicitly recognized. Failure to recognize these risks has caused considerable loss to many business firms.
2. Paying a salesperson on a strict commission basis transfers to him the risk of “no sales,” as compared to paying a salesperson some salary regardless of the amount sold. The employer of the commissioned salesperson pays no compensation if sales are not made. In the long run, however, such a policy may cost management dearly in terms of loss of customer goodwill, failure of salespersons to service their territories thoroughly or to cultivate new small firms which could eventually become large volume customers
3. Placing a person who is essentially a risk averter into a position which involve considerable risk taking. Studies show that such a policy generally results in higher labor turn-over, poor performance, and generally poor morale among the individuals so placed.
1. Deciding to build a plant with too little capacity or too great a capacity for the size of the expected market. If, for example, a firm overbuilds, overhead costs absorb profit margins which tend to be thin anyway due to relatively great supply, when compared to the demand. If the plant has too little capacity potential, business may be lost to competitors, leading to permanent loss of market share.
2. Another area of production risk lies in the area of inventory control. If inventories are allowed to build up to levels too high for current demand, unacceptably high costs of storage, insurance, obsolescence, and deterioration may result.
If inventories are kept too low, orders may be lost due to inability to fulfill customer demand promptly, or extra costs involved in special production runs to fulfill special orders may be incurred.
3. Failure to plan proper plant layout or to construct plants initially with built-in loss prevention measures may increase production costs to noncompetitive levels. For example, a sprinkler system in most areas will repay its costs within five years in reduced property insurance premiums. These production risks can be reduced only by careful advance planning, much research, and study.
Environmental Risk as a type of business risk
Environmental risk has assumed great importance for the business firm in recent years for business decisions involving both domestic and foreign activities.
- It is well recognized that certain areas in a city or regions in a country may present unacceptable levels of risk for business operations, due to the existence of poverty, crime, poor law enforcement, unavailability of insurance, and existence of fire hazards.
- Rising rates of crime, divorce, and other types of social disintegration threaten environmental security, and create new problems for business and for insurers.
- International operations often present greater risks than domestic operation’s clue to difficulties in evaluating unfamiliar conditions abroad. F T. Haner has developed a formal method for quantifying international environmental risk, elements of which are composed of some 15 factors said to produce operational risk for the business firm doing business abroad. Among these factors are:-
- political stability,
- ease of conversion of currency to foreign exchange,
- internal inflation,
- attitudes of governmental official toward foreign investors,
- rate of economic growth,
- quality of legal and accounting services,
- quality of labor supply,
- stability of labor relations,
- Quality of communications.
Weights are assigned to each factor according to subjective evaluations of the degree of risk present and a composite index summarizing the quality of the international environment of each of the major countries in the work. In this way risk may be given explicit recognition by management before investments are made or operations begun abroad.
Conclusion business riskon business risk
Every business enterprise is exposed to risks in its environment and should therefore devise means of dealing with them as a survival strategy.