Chapter 12 Practical Guidelines in Reducing and Managing Business Risks

Question 1

A defining characteristic of the entrepreneurial decision-maker.

Answer 1

Willingness and readiness to take personal and financial risks

Question 2

In late 90s, what did a study commissioned by an internationally known accounting firm found out? (2 things)

Answer 2

• 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

Question 3

What are the practical guidelines in managing and reducing risk?

Answer 3

1. Understand the nature of risk
2. Identify and prioritize risks
3. Consider the acceptable level of risk
4. Understand why risk become reality
5. Apply a simple risk management process
6. Avoiding and mitigating risk
7. Create a positive climate for managing risk
8. Overcoming the fear of risk

Question 4

This approach within and outside the organisation is crucial and allows to make informed decisions.

Answer 4

Identification of significant risks

Question 5

Examples of significant risks

Answer 5

1. Loss of a major customer
2. Failure of a key supplier
3. Appearance of a significant competitor

Question 6

A former British prime minister once said:

Answer 6

“To be alive at all involves some risk.”

Question 7

What are the typical areas of organizational risk?

Answer 7

1. Financial
2. Commercial
3. Straregic
4. Technical
5. Operational

Question 8

Organizational risks in Financial area

Answer 8

1. Accounting decisions and practices
2. Treasury risks
3. Fraud
4. Robustness of information management systems
5. Inefficient cash management
6. Inadequate insurance

Question 9

Organizational risks in Commercial area

Answer 9

1. Loss of key personnel and tacit knowledge
2. Failure to comply with legal regulations or codes of practice
3. Contract conditions
4. Poor brand management or handling of a crisis
5. Market changes

Question 10

Organizational risks in Technical area

Answer 10

1. Failure of plant or equipment
2. Accidental or negligent actions (such as fire, pollution, floods)

Question 11

Organizational risks in Operational area

Answer 11

1. Product or design failure, including failure to maintain supply
2. Client failure
3. Breakdown kn labour relations
4. Corporate malpractice (such as sex discrimination)
5. Political change

Question 12

What is a catalyst?

Answer 12

A person or event that quickly causes change or action.

Question 13

5 most significant types of RISK CATALYSTS

Answer 13

1. Technology
2. Organizational Change
3. Processes
4. People
5. External Factors

Question 14

Stages of managing the enterprise-wide risk inherent in decisions

Answer 14

1. Assess and analyze the risks resulting from a decision by systematically identifying and quantifying them.
2. Consider how best to avoid and mitigate them.
3. Take action to manage control and monitor the risks.

Question 15

Risks that result only in costs

Answer 15

Non-trading risks

Question 16

Where does risk management relies on?

Answer 16

Timely and accurate information

Question 17

They should provide details of the likely areas of risk, and the information needed to control the risks.

Answer 17

Management information systems

Question 18

The following questions when answered truthfully and positively will assist managers in deciding how to manage the risks that confront the business enterprise.

Answer 18

• 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?

Question 19

What is the lifeblood of a business, heavily influencing strategies and decisions at every level?

Answer 19

Finance

Question 20

This is used to monitor and manage the results of past decisions, assess the current situation and highlight solutions.

Answer 20

Variance Analysis

Question 21

Common causes of variances:

Answer 21

• Inefficiency
• Poor or flawed planning
• Poor communication
• Interdependence between departments
• Random factors

Question 22

Market entry barriers

Answer 22

• 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

Question 23

A point when sales cover costs, where neither a profit or loss is made.

Answer 23

Break-even point

Question 24

Break-even formula

Answer 24

Cost of Project
÷ Gross of Profit (at specific dates)

Question 25

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.

Answer 25

Break-even analysis

Question 26

Also know as break-even analysis.

Answer 26

Cost-Volume-Profit Analysis or CVP Analysis

Question 27

This analysis also helps in managing the sales mix, cost structure and production capacity, as well as in forecasting and budgeting.

Answer 27

Break-even analysis

Question 28

How to control costs?

Answer 28

1. Focus on the big items of expenditure.
2. Be cost aware.
3. Maintain a balance between costs and quality.
4. Use budgets for dynamic financial management.
5. Develop a positive attitude to budgeting.
6. Eliminate waste.

Question 29

The enemy of cost control

Answer 29

Casualness

Question 30

This provides a starting point for cash flow forecasts and revenues, and plays an essential role in monitoring costs and revenues.

Answer 30

Budget

Question 31

Practical techniques to improve profitability

Answer 31

1. Focus decision-making on the most profitable areas.
2. Decide how to treat the least profitable products.
3. Make sure new products enhance overall profitability.
4. Manage development and production decisions.
5. Set the buying policy.
6. Consider how to create greater value from existing customers and products to enhance profitability.
7. Consider how to increase profitability by managing people.

Question 32

Principles that will help avoid flawed financial decision-making

Answer 32

1. Financial expertise must be widely available.
2. Consider the impact of financial decision.
3. Avoid weak budgetary control.
4. Understand the impact of cash flow.
5. Know where the risk lies.