Risk Managment Flashcards
What is 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. Risk can also be expressed as “uncertainty”. It means the possibility of incurring losses due to problems and circumstances, expected or unexpected.
Some of the risks facing businesses are reasonably predictable, and the likelihood of these risks occurring, along with the impact of these risks on the business, can be measured. This type of risk is known as…
A quantifiable risk
Quantifiable risks
Financial risk e.g. the probability that a major customer becomes bankrupt and does not pay money owed to a supplier.
Operational risk e.g. the breakdown of key equipment or machinery.
Strategic risk e.g. a new competitor coming on to the market.
Compliance risk e.g. responding to the introduction of new health and safety legislation.
The risk management process includes
The identification and analysis of risks to which the organisation is exposed.
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.
The next step is to analyse and attempt to remove the risks. Within large businesses, specialist risk managers have a role in measuring risk and putting in place systems that reduce chances of negative outcomes occurring.
Examples of preventative actions:
training staff appropriately
regular backup of IT systems
putting robust quality control systems in place
installing a sprinkler system.
What is a contingency plan
A contingency plan is a plan of action to be followed in the event of an emergency or crisis which threatens to destroy or significantly disrupt the continued operation of normal business activities. The plan should restore to normal the business’ day-to-day functioning, or as near to normal as possible. All this needs to be done as fast as possible.
What is crisis management
Crisis management involves how a business responds to an unforeseen event that threatens the business. There are many recent examples of major events affecting businesses’ capability to operate normally. These have varied from terrorist atrocities, natural disasters or extreme climate events, to failures of operational control. A well-run business will have plans in place to deal with the unexpected; reduce the impact of unforeseen events; and get back to normal as soon as possible.
The value of contingency planning
If preparing a contingency plan means that damage to a business’ reputation can be minimised and profits/ dividends maintained, then undoubtedly it is of great value. The likely benefits of effective contingency planning that helps maintain staff morale and provides continuity of products or services cannot be underestimated. If it reduces the impact on customers and protects against potential losses, then it is well worth the money.
Nonetheless, it can be a very costly activity. Large multinational businesses involve huge numbers of very expensive staff in assessing risk and planning what to do if things go wrong. However, if nothing goes wrong, it might be regarded as a complete waste of money. Nevertheless, the growth in contingency planning, especially in large organisations, suggests that businesses are keen to reduce their risks to as low a level as possible. In other words, they see the costs involved as being money well spent.
