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Lecture 2

The document outlines the essential features of risk management, emphasizing that it should be proportionate, aligned, comprehensive, embedded, and dynamic (PACED) to ensure effective business operations. It discusses various definitions and types of risk, including insurable and non-insurable risks, and highlights the causes of business risk, which can stem from natural, human, economic, and physical factors. Additionally, it stresses the importance of risk management in helping organizations navigate uncertainties and achieve their objectives.

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25 views6 pages

Lecture 2

The document outlines the essential features of risk management, emphasizing that it should be proportionate, aligned, comprehensive, embedded, and dynamic (PACED) to ensure effective business operations. It discusses various definitions and types of risk, including insurable and non-insurable risks, and highlights the causes of business risk, which can stem from natural, human, economic, and physical factors. Additionally, it stresses the importance of risk management in helping organizations navigate uncertainties and achieve their objectives.

Uploaded by

clarizzebalungay
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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FEATURES OF RISK MANAGEMENT

When we say features, what should be the characteristic or traits of


Risk management so that the operation of the business or organizations
become effective and efficient. But contrary to this statement, Failure to
manage the risks faced by an organization can be caused by inadequate risk
recognition, insufficient analysis of significant risks and failure to identify
suitable risk response activities. So, it is important to know the traits of Risk
management. To be successful, the risk management initiative should be
proportionate, aligned, comprehensive, embedded, and dynamic
(PACED).

1. Proportionate - means that the effort put into risk management


should be appropriate to the level of risk that the organization
faces.
2. Aligned - Risk management activities should be aligned with
other activities within the organization.
3. Comprehensive - so that any risk management initiative covers all
the aspects of the organization and all the risks that it faces.
4. Embedded - is where the right techniques are applied where
appropriate, in the right strength, and in a way that generates
evidence of operation and effectiveness.
5. Dynamic – mark as continues and productive to the changing
business environment faced by the organization.

APPROACHES TO DEFINING RISK

The Oxford English Dictionary definition of Risk is as follows: ‘a


chance or possibility of danger, loss, injury or other adverse consequences’,
and the definition of at risk is ‘exposed to danger’. In this context, risk is
used to signify negative consequences. However, taking a risk can also
result in a positive outcome. A third possibility is that risk is related to
uncertainty of outcome.

Risk is the possibility of loss and injury, it has also a potential of


Negative impact. In Business risk is the possibilities a company will have
lower than anticipated profits or experience a loss rather than taking
a profit. Business risk is influenced by numerous factors, including
sales volume, per-unit price, input costs, competition, and the overall
economic climate and government regulations.

We can also define Risk as s uncertainties or unexpected events, which


are beyond control. In simple words, we can say business risk means a chance
of incurring losses or less profit than expected. These factors cannot be
controlled by the businessmen and these can result in a decline in profit or can
also lead to a loss.

1. Arises due to Uncertainties.

Uncertainties mean when you are not sure of what is going to happen in
future. Common examples of uncertainties are change in demand,
government policy, technology etc. Business risk is due to these uncertainties.

2. Essential part of any Business

A risk is an important characteristic of business. No business can avoid risk


although the degree of risk may vary Risk can be reduced but cannot be
eliminated.

3. Degree of Risk Depends upon the Nature and Size of Business

The degree of risk depends upon the type of business; for example, a
business involved in fashion items bears more risk as compared to the
business involved in standardized goods. Similarly, a business operating at
large scale bears more risk as compared to small-scale business houses.

4. Profit is the Reward for bearing the Risk:

The business earns a profit because they are bearing risk. “No risk no
gain” larger the risk more is the profit. An entrepreneur bears risk with the
expectations of earning a profit.

Causes of Business Risk

Natural Causes

Nature is an independent phenomenon and human beings have


no control over it. Natural calamities like earthquake, flood, drought, famine
etc. Affect a business a lot and can result in heavy losses. The natural causes
are such type of uncertain factors that human beings cannot make any
preparation against.
“Meaning to say we cannot foresee this fortuitous event and all we
must do is be ready for what things may happen. “

Human Causes

Human causes are related to a chance of loss due to human being or


employees of the organization. The dishonesty of employees can bring heavy
losses for business e.g., the employees may leak a business secret to a
competitor and may commit fraud also bring heavy losses by wastage of
resources.

The employees may hamper the production by going on strikes, riots


etc. This can also lead to heavy loss of business condition. There can be price
fluctuations in the market, there can be a change in fashion, taste,
preferences, and demands of customers.

“Be careful of what we Trust as a company owner and Learn to


evaluate and assess our employees as they may be the reason why a
company may take at high risk.”

Economic Causes

Economic causes are related to a chance of loss due to change in the


market. There can be a change in the degree of competition. All these have a
direct impact on the earnings of the business.

Even change in Government policy affects the business a lot. For example,
in 1971 when Janata government came to power the Coca-Cola Company and
many other foreign companies were sent back to India

“We cannot assure that in all aspects of life of a business is Perfect,


there are times that our economic growth or status of our company is
always up so we must take good care of handling risk that may come
to us for our Companies future.”

Physical Causes

All the causes which result in damage of assets are considered as a


physical cause, for example, change in technology may result in machinery
being outdated, use of old technology, mechanical defects may also result in
damage of assets such as the bursting of a boiler, accident to employee etc.
Types of Business Risk

The business risk can be classified into two major categories:

Insurable Risk

The risks which can be recovered are called insurable risks. The losses
which can be made good or losses for which company can get compensation
from the insurance company are called Insurable Risks. Generally, the natural
and physical risks are insurable risks, e.g., businessmen can take a fire
insurance policy to get protection from flood, earthquake or from the damage
of assets such as the bursting of boiler etc.

Non-insurable Risks

The risks for which no protection is available are called Non-insurable


risks. The businessmen cannot get compensation for a change in demand or
loss due to negligence or carelessness of employees. Whether the risk is
insurable or non-insurable, only the loss can be shared but the risk remains.

Minimization of Risk

Business has many risks but it can also be avoided by adopting some
measures. Management can adopt the technique to minimize the chance of
occurring any particular event which form may cause the loss. All the risks
cannot be avoided but these can be minimized.

So such policies are adopted which reduce the loss. For example, there
is a greater risk to send the product by air then by train. So the risk can be
reduced by sending the product by train. Similarly, when you introduce a new
product, there is a greater risk, so you may refuse to avoid the risk.

Though a firm can never escape from a presence of any risk it can still
employ methods to avoid them. For instance, the firm can:

1. Avoid itself from entering into a risky transaction.

2. Preventive measures can be taken like firefighting.

3. Transfer the risk to an insurance company by taking a policy:


4. Share risk with other enterprises by making the manufacturers
agree to compensate the losses in the case of falling prices.

Organization Definition of risk

ISO Guide 73

Effect of uncertainty on objectives. Note that an effect may be


positive, negative, or a deviation from the expected. Also, risk is often
described by an event, a change in circumstances or a consequence.

Institute of Risk Management (IRM)

Risk is the combination of the probability of an event and its


consequence. Consequences can range from

Orange Book from HM Treasury

Uncertainty of outcome, within a range of exposure, arising from a


combination of the impact and the probability of potential events.

Institute of Internal Auditors

The uncertainty of an event occurring that could have an impact on


the achievement of the objectives. Risk is measured in terms of
consequences and likelihood.

“Given that there are many available definitions for the word
risk, it is important that the organization chooses the definition that
is most suitable for its own purposes.”

IMPACT OF RISK ON ORGANIZATION

After defining Risk, we can surely identify what may be the impact of
Risk on Organization. But before knowing the impact of risk we must first
identify and manage them before they even affect the business. The ability
to manage risk will help companies act more confidently on future business
decisions. Their knowledge of the risks they are facing will give them
various options on how to deal with potential problems.

Risk can come from both internal and external sources. The external
risks are those that are not in direct control of the management. These
include political issues, exchange rates, interest rates, and so on. Internal
risks, on the other hand, include non-compliance or information breaches,
among several others.
Furthermore, there are possible impact of Risk to an organization, but
one thing or main reason for this is that Business may incur loses once they
can’t handle the risk carefully. So, Risk management is important in an
organization because without it, a firm cannot possibly define its objectives
for the future. If a company defines objectives without taking the risks into
consideration, chances are that they will lose direction once any of these
risks hit home.

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