risk management Flashcards
(16 cards)
risk management
risk management refers to the practice of identifying potential risks in advance, analysing them and taking precautionary steps to minimise a firms exposure to the risk.
business risk
Business risk is a circumstance or factor that may have a significant negative impact on the operations or profitability of a given business.
Business risk can result from internal conditions or external factors that may be present in the wider business world.
types of risks
financial, operational, strategic, compliance
can be planned for, and measures can be taken to minimise the effects of such risks on the business.
insurable risks
Many quantifiable risks are also Insurable Risks. For example, insurance can be taken out against the failure of a major customer and a service contract can be arranged to cover the breakdown of equipment and machinery.
unisurable risks
These arise when the probability of the risk occurring is impossible to quantify - so insurance companies are unable to price the risk. Some occurrences, such as those which take place during civil unrest, or even war, are simply too widespread to even consider insuring
external risks
- Public relation failures
- employee error
- product failures
- natural disaster
- economic factors
- legal challenge
- equipment failure
- supply chain problems
risk management ~2
It involves the activities undertaken by a business, which are designed to control and minimise threats to the continuing efficiency, profitability and success of its operations.
process of risk management
- the identification and analysis of risks to which the organisation is exposed
- categorising in terms of severity
- a measurement of the likelihood of the risks occurring
- an assessment of potential impacts on the business
- deciding what action can be taken to eliminate or reduce risk- planning response
helping minimise disruption
prevention actions
- train staff properly- reduce employee error and improve safety
- regular backup of IT systems, recover quickly from cyber attacks or system failures
- put robust quality control systems in place
- install a sprinkler system limit damage of fire
security measures, cctv to prevent theft or damage
contingency planning
A contingency plan is a plan of action to be followed in the event of an emergency or crisis occurring which threatens to destroy or significantly disrupt the continued operation of normal business activities
types of risks that a business might encounter
- natural disasters, earthquakes, flooding
- failure of technology- such as cyber attacks- failure to contact customers, access operations/ control, make transactions, threat of loosing customer trust
- failure of equipment , inability to match supply to demand, faulty goods
employee error- which could damage reputation of the business and risk of criminal charges
- supply problems
shortage of raw materials
product recalls
problems with supply chain
economic factors
consumer confidence and demand
changing interest rates and exchange rates
legal challenges
legal action by stakeholders
regulatory fines
cost and damaged reputation
PR crisis
negative media backlash e.g. unethical behaviour
product failures- unsafe or faulty products- recalls and damaged reputation
certainty and costs of risk prevention
Some risks are more likely to occur (e.g. employee error, IT failure) and so prevention is often cost-effective.
Others (e.g. natural disasters) are less likely but more damaging, so prevention may be limited to essential measures.
Businesses weigh the cost of prevention vs. likelihood/impact to decide how much to invest.
crisis management
The actions taken during and after a crisis to minimise harm and recover.
ways to use contingency planning
Contingency Funds – emergency savings to cover unexpected costs.
Alternative Production Arrangements – backup suppliers, alternative factories.
Allocated Responsibilities – key roles assigned in advance for emergencies.
PR and Communication Plans – manage media, customer and stakeholder communication during crises.
costs and benefits of risk management and contingency planning
Benefits:
Ensures business continuity.
Builds stakeholder confidence (investors, customers, employees).
Reduces legal liability and improves safety and compliance.
Can be a competitive advantage (businesses seen as reliable/resilient)
Drawbacks:
Can be costly and time-consuming.
Some risks are impossible to predict or prepare for fully.
May lead to over-preparation for rare events.
proactive v reactive responses
Proactive Responses (e.g. training, insurance, contingency plans) can:
Reduce losses.
Improve recovery time.
sense of security
Protect reputation and stakeholder confidence.
although… costly and time consuming, needs reviewing, lack of predictability
Reactive Responses (e.g. panicked decisions or delays) may:
Worsen the situation.
Increase long-term costs and reputational damage.
