• March 31st, 2018
  • Posted by athanne

Business Risk

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 Risk

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.

 Business RiskBuying 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.

Finance Risk

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.

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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,

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Investment decisions,

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.

Personnel Risk

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.

Production Risk

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.

  1. 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.
  2.  Rising rates of crime, divorce, and other types of social disintegration threaten environmental security, and create new prob­lems for business and for insurers.
  3. 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:-
  4. political stability,
  5. ease of con­version of currency to foreign exchange,
  6.  inter­nal inflation,
  7. attitudes of governmental official toward foreign investors,
  8. rate of economic growth,
  9. quality of legal and accounting services,
  10. quality of labor supply,
  11. stability of labor relations,
  12. 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.

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