Risk Management Flashcards
Risk (formula)
= likelihood x impact
Types of risk attitude
~ defenders (low risk)
~ prospectors (risk seeking)
~ analysers (balanced attitude)
~ reactors (risk averse)
Types of risk
BOSH FC Business risk a) Operational risk b) Strategic risk c) Hazard risk Financial risk Compliance risk
Other risks
~ trading risks e.g. credit risks ~ cultural risks ~ political risks ~ legal risks ~ IT system risks
Risk responses
Accept - low frequency, low severity
Reduce - high frequency, low severity
Transfer - low frequency, high severity
Avoid - high frequency, high severity
Techniques for dealing with uncertainty
~ sensitivity analysis
~ break-even analysis
~ scenario building
Sensitivity analysis
100% x profit/variable
Weaknesses of sensitivity analysis
~ examines one risk at a time
~ extent of change needed b4 breakeven but not probability of it occurring
Breakeven output (formula)
= total fixed costs/ contribution per unit
Required output (formula)
= (total fixed costs + required profit)/ contribution per unit
Margin of safety (formula)
= (planned sales - breakeven sales)/ planned sales
Breakeven price is equal to…
total cost per unit
Opportunity costs
cash flow foregone if resource used for alternative product
Expected value
~ weighted average, based on probabilities
~ guide for mgt
Limitations for decision trees
~ doesn’t account for time value of money
~ not suitable for complex situations
~ probabilities may be unreliable or inaccurate
Strategic planning
considers business dev over 10-15yrs
Business planning
considers business dev over 12m
Budgeting process
- standard setting
- budget
- variance analysis
- performance measurement
- accountability
Pros of budgeting
PRIME Planning Responsibility Integration Motivation Evaluation
Cons of budgeting
~ out of date targets
~ often top-down process
~ many aspects are non-controllable
