Chapter 12 Practical Guidelines in Reducing and Managing Business Risks Flashcards
A defining characteristic of the entrepreneurial decision-maker.
Willingness and readiness to take personal and financial risks
In late 90s, what did a study commissioned by an internationally known accounting firm found out? (2 things)
- Europe strategies focus on avoiding and hedging risk
- Anglo-American companies view risk as an opportunity and accept risk management as necessary to achieving their goals
What are the practical guidelines in managing and reducing risk?
- Understand the nature of risk
- Identify and prioritize risks
- Consider the acceptable level of risk
- Understand why risk become reality
- Apply a simple risk management process
- Avoiding and mitigating risk
- Create a positive climate for managing risk
- Overcoming the fear of risk
This approach within and outside the organisation is crucial and allows to make informed decisions.
Identification of significant risks
Examples of significant risks
- Loss of a major customer
- Failure of a key supplier
- Appearance of a significant competitor
A former British prime minister once said:
“To be alive at all involves some risk.”
What are the typical areas of organizational risk?
- Financial
- Commercial
- Straregic
- Technical
- Operational
Organizational risks in Financial area
- Accounting decisions and practices
- Treasury risks
- Fraud
- Robustness of information management systems
- Inefficient cash management
- Inadequate insurance
Organizational risks in Commercial area
- Loss of key personnel and tacit knowledge
- Failure to comply with legal regulations or codes of practice
- Contract conditions
- Poor brand management or handling of a crisis
- Market changes
Organizational risks in Technical area
- Failure of plant or equipment
- Accidental or negligent actions (such as fire, pollution, floods)
Organizational risks in Operational area
- Product or design failure, including failure to maintain supply
- Client failure
- Breakdown kn labour relations
- Corporate malpractice (such as sex discrimination)
- Political change
What is a catalyst?
A person or event that quickly causes change or action.
5 most significant types of RISK CATALYSTS
- Technology
- Organizational Change
- Processes
- People
- External Factors
Stages of managing the enterprise-wide risk inherent in decisions
- Assess and analyze the risks resulting from a decision by systematically identifying and quantifying them.
- Consider how best to avoid and mitigate them.
- Take action to manage control and monitor the risks.
Risks that result only in costs
Non-trading risks
Where does risk management relies on?
Timely and accurate information
They should provide details of the likely areas of risk, and the information needed to control the risks.
Management information systems
The following questions when answered truthfully and positively will assist managers in deciding how to manage the risks that confront the business enterprise.
- Where are the greatest areas of risk relating to th most significant strategic decisions?
- What level of risk is acceptable for the company to bear?
- What are the potentially disclosing events that could inflict the greatest damage on your organisation?
- What are the risks inherent in the organisation’s strategic decisions, and what is the organisation’s ability to reduce their incidence and impact on the business?
- What is the overall level of exposure to risk? Has this been assessed and is it being actively monitored?
- What are the costs and benefits of operating effective risk management controls?
- What review procedures are in place to monitor risks?
- Are the risks inherent in strategic decisions (such as acquiring a new business, developing a new product or entering a new market) adequately understood?
- At what level in the organisation are the risks understood and actively managed? Do people fully realize the potential consequences of their actions, and are they equipped to understand, avoid, control or mitigate risk?
- To what extent would be company be exposed if key staff left?
- If ther have been major developments (such as new management structure or reporting arrangements), are the new responsibilities understood and accepted?
- Are management information systems keeping pace with demands? Are there persistent black spots — priority areas where the system needs to be improved or overhauled?
- Do employees resent risk, or are they encouraged to view certain risk as opportunities?
What is the lifeblood of a business, heavily influencing strategies and decisions at every level?
Finance
This is used to monitor and manage the results of past decisions, assess the current situation and highlight solutions.
Variance Analysis
Common causes of variances:
- Inefficiency
- Poor or flawed planning
- Poor communication
- Interdependence between departments
- Random factors
Market entry barriers
- The need to compete with businesses that enjoy economies of scale, or established differentiated products
- Capital requirements
- Access to distribution channels
- Factors independent of scale (technology or location)
- Regulatory requirements
A point when sales cover costs, where neither a profit or loss is made.
Break-even point
Break-even formula
Cost of Project
÷ Gross of Profit (at specific dates)
This analysis is used to decide where to continue developing a product, alter the price, provide or adjust a discount, or change suppliers to reduce costs.
Break-even analysis
Also know as break-even analysis.
Cost-Volume-Profit Analysis or CVP Analysis
This analysis also helps in managing the sales mix, cost structure and production capacity, as well as in forecasting and budgeting.
Break-even analysis
How to control costs?
- Focus on the big items of expenditure.
- Be cost aware.
- Maintain a balance between costs and quality.
- Use budgets for dynamic financial management.
- Develop a positive attitude to budgeting.
- Eliminate waste.
The enemy of cost control
Casualness
This provides a starting point for cash flow forecasts and revenues, and plays an essential role in monitoring costs and revenues.
Budget
Practical techniques to improve profitability
- Focus decision-making on the most profitable areas.
- Decide how to treat the least profitable products.
- Make sure new products enhance overall profitability.
- Manage development and production decisions.
- Set the buying policy.
- Consider how to create greater value from existing customers and products to enhance profitability.
- Consider how to increase profitability by managing people.
Principles that will help avoid flawed financial decision-making
- Financial expertise must be widely available.
- Consider the impact of financial decision.
- Avoid weak budgetary control.
- Understand the impact of cash flow.
- Know where the risk lies.
