PRACTICAL GUIDELINES IN REDUCING AND MANAGING BUSINESS RISKS
How is Practical Guidelines and Managing
Business Risks best achieved?
- Applying the principles and techniques
appropriate to the situation.
UNDERSTAND THE NATURE OF RISK
Defining characteristic of the entrepreneurial
decision-maker
- The willing and readiness to take
personal and financial risks
A study commissioned by an internationally-
known accounting firm FOUND
Continental Europe Strategies
- focus on avoiding and hedging risk.
Anglo-American Companies
- view risk as an opportunity
- accept risk management as
necessary to achieving their goals
“In 2017, this relative attitude to risk among
European and US companies remain broadly the
same”
This attitude is the result of
1. Long- standing cultural experiences
2. History
3. Recent Events
What is the starting point?
- Accepting that risks exist
But what is the most important?
- To create the right climate for risk
management
People need to understand that control
systems are needed:
1. This requires communication.
2. Leadership skills
Why?
- so that standards are set and clearly
understood
IDENTIFY AND PRIORITIZE RISKS
“Identification of significant risk both within
and outside the organization is CRUCIAL and
allows to make INFORMED DECISION”
- also this makes it easier to avoid
unnecessary surprises.
Examples of a Significant Risk
1. Loss of a major customer
2. the failure of key supplier
3. Appearance of a significant
competitor
HUMAN FACTOR
- people behave differently.
(#inconsistency of decision-making). They may
be
1. Exuberant
2. Diffident
3. Overconfident
4. Overly concerned
#Because of this “they may simply overlook the
issue of risk”
Former British Prime Minister
- #he said that “ To be alive at all involves some
risk”
Identification of Risk
o helps to define the categories into
which they fall.
o allows for a more structured analysis
o reduces the chances being overlooked
CONSIDER THE ACCEPTABLE LEVEL OF RISK
First Step
- Determine the nature and extent of the risk
the business will accept.
What does this involve?
- Assessing the likelihood of risks becoming
reality and the effect they would have If they
did.
Why do we have to understand these?
- Only then can measures be taken to minimize
the incidence and the impact
Opportunity Cost
- Avoiding risk may mean avoiding a potentially
big opportunity. People can be too cautious and
risk averse even though they are often at their
best when facing the pressure of risk deciding
to take more audacious approach.
Sometimes, what is the greatest risk?
- TO DO NOTHING
UNDERSTAND WHY RISK BECOME REALITY
Second Step
- Rank the risk according to likelihood and
potential impact
- this helps to highlight not only where things
might go wrong and what their impact would,
but also why and where these catalysts might
be triggered.
5 MOST SIGNIFICANT TYPES OF RISK CATALYSTS
1. Technology- New hardware, software or
system configurations trigger risk, as can new
demands on existing information systems and
technology.
2. Organizational Change- risk are triggered by
new management structures or reporting lines
, new strategies and commercial agreements.
3. Processes- New products markets and
acquisitions
 PRACTICAL GUIDELINES IN REDUCING AND MANAGING BUSINESS RISKS
4. People- Hiring new employees, losing key
people poor succession planning, or weak
people management can all create dislocation
- but Main Danger – BEHAVIOR
(laziness, fraud, exhaustion and simple human
error)
5. External Factors- Changes to regulation, and
political, economic or social developments can
all affect strategic decisions by bringing into
surface risk that may have lain hidden. (e.g
SARS epidemic from China to the rest of Asia in
2002)
APPLY A SIMPLE RISK MANAGEMENT PROCESS
Stages in managing Enterprise-wide risk
inherent in decisions
1. Assess and analyze risk- by systematically
identifying and quantifying them.
2. Consider how best to avoid or mitigate them.
3. In parallel with the second stage, take action
to manage control and monitor the risks.
A. RISK ASSESSMENT AND ANALYSIS
“It is more difficult to assess risk than to identify
them”
Risk that lead to frequent losses
- can be solved using past experience
Unusual or infrequent losses
- are harder to quantify
THUS, it is sensible to quantify potential
consequences of identified risks and define the
courses of action to remove or mitigate them
Each category can be mapped in terms of
1. Frequency
2. Potential Impact ranging from
convenient to catastrophic)
B. RISK MANAGEMENT AND CONTROL
- risk should be given high priority across the
whole organization
Risk Management Procedures and Techniques
should be
o Well documented
o Clearly communicated
o Regularly reviewed and monitored
Top Right Quadrant
- require urgent action
Bottom- right Quadrant
- should not be ignored because
complacency, mistakes and a lack of control can
turn risk into a reality
EMPLOYEES
“All employees must be aware that
unnecessary risk-taking is unacceptable.”They
should understand:
o where risks are
o where they lie
o And their Role in controlling them
How to achieve this?
o Share information
o Communicate clear guidelines
o Establish clear procedures and risk
measurement systems
C. AVOIDING AND MITIGATING RISKS
1. Start by reducing or eliminating those risks
that result only in costs: NON-TRADING RISKS
- the fixed cost of risk and might
include:
1. property damage risks,
2. legal and contractual liabilities and;
3. business interruption risk
How can reducing these risks be achieved?
o Quality assurance programs
o Environmental control processes
o Enforcing health and safety regulations
o Installing accident prevention and
emergency equipment
o Training people to use it
o Taking security measure to prevent
crime, sabotage, espionage and threats
to people and systems
What does reducing risk also mean?
- Cost of insuring against it goes down
OTHER WAYS TO REDUCE RISK
Sharing – Joint Ventures, licensing and agency
agreements
“To reduce the chances of things going wrong-
DOING THE RIGHT THINGS RIGHT REDUCES
RISKS AND COSTS”
What does it Rely on?
- Accurate and timely information
CREATE A POSITIVE CLIMATE FOR MANAGING
RISK
“The ethos of an organization should recognize
and reward behavior that manages risk”
- it requires commitment by senior
managers and the resources ( including training
) to match.
Control Systems
- too often, it is seen only as an
additional overhead
- but it’s something that adds value by
ensuring;
1. the effective use of assets,
2. the avoidance of waste and;
3. the success of key decisions
OVERCOMING THE FEAR OF RISK
Taking Risk
- needed to keep ahead of the
competition
Managing Risk
- is only one possible strategy
Using Risk to achieve success
 PRACTICAL GUIDELINES IN REDUCING AND MANAGING BUSINESS RISKS

- Another approach- adding value and “ Consider where the barriers to entry lie for
outstripping competitors your market sectors, how vulnerable you are to
How to do this? new entrants , and whther you can strengthen
Organizations need to stop taking the fun out of and entrench your market position”
the risk by controlling it in ways that are
perceived as bureaucratic and stifling C. BREAK-EVEN ANALYSIS
CONTROLLING AND MONITORING Break-even- where sales cover costs
ENTERPRISE-WIDE RISK - computed by dividing the cost of the
Questions that assist managers in deciding how project by the gross profit at specific dates
to manage risk making sure to allow for overhead cost
PRACTICAL CONSIDERATIONS IN MANAGING Break-even Analysis (Cost-Volume-Profit
AND REDUCING FINANCIAL RISK analysis)
FINANCE – is the lifeblood of a business heavily - is used to decide whether to continue
influencing strategies and decisions at every developing a product, alter the price, provide or
level. adjust a discount or change suppliers to reduce
What needs to be considered when setting and costs
reviewing strategy? - It also helps in managing
o Profitability 1. Sales Mix
o Cash Flow 2. Cost structure
o Long-term shareholder value 3. Production Capacity
o Risk 4. Forecasting and budgeting
Practical guidance about financial decisions
o Improve profitability D. CONTROLLING COSTS
o Avoid pitfalls 1. Focus on the big items of
o Reduce financial risk expenditure- Categorize cost into major
IMPROVING PROFITABILITY or peripheral items
“Entrepreneurial flair and financial rigor- are as 2. Be cost aware- Casualness is the
much about attitude as skill” enemy of cost control. Costs can be
A. VARIANCE ANALYSIS reduced over the medium to long-term
- interpreting differences between by managers’ attitudes to cost control
actual and planned performance. It is used to 3. Maintain a balance between cost
1. Monitor and Manage the results of past and quality- best value (balance
decisions between price and quality received
2. Assess the current situation 4. Use budgets for dynamic financial
3. highlights solutions management- budgets provide starting
common causes of Variances point for cash flow forecasts and
1. Inefficiency revenues , they also play important role
2. Poor or flawed planning in monitoring costs and revenues
3. Poor communication 5. Develop a positive attitude to
4. Interdependence between departments budgeting- Feeling a sense of
5. Random Factors ownership and responsibility for
“ Every business should variance analysis but in developing, monitoring, and controlling
a practical and pragmatic and cost effective it.
way” 6. Eliminate Waste- (Japanese
B. ASSESSMENT OF MARKET ENTRY and EXIT companies); Achieve this by using
BARRIERS techniques such as process analysis,
Entry Barriers include mapping and re-engineering.
o Compete with businesses that enjoy
economies of scale PRACTICAL TECHNIQUES TO IMPROVE
o or has established differentiated PROFITABILITY
products 1. Focus decision-making on the most
Other Barrier profitable areas – involves redirecting sales by
o Capital requirements concentrating on products or services with the
o Access to distribution channels best margin
o Factors independent of scale 2. Decide how to treat the least profitable
(technology or location) products
o Regulatory requirements - turn around a poor performer or
abandon it
 PRACTICAL GUIDELINES IN REDUCING AND MANAGING BUSINESS RISKS

3. Make sure new products enhance overall

profitability- #Don’t only focus on the market
need or the production process but #also
consider cost, price, sales volume, and overall
profitability (inextricably linked)
4. Manage development and production
decisions
- #Research cost, methods used must be given
emphasis. Too little expenditure may increase
cost in the long term
5. Set the buying policy
- should there be a small number of
preferred suppliers or a bidding system among
a wider number of potential suppliers, also
consider
1. Controlling delivery costs
2. Monitoring exchange rates
3. Improving quality control
4. Reducing inventory
5. Improving production lead times
6. Consider how to create greater value from
existing customers and products to enhance
profitability
7. Consider how to increase profitability by
managing people- successful leadership

AVOIDING PIT FALLS

The ff. principles may help to to avoid flawed
financial decision making
1. Financial expertise must be widely available-
people need to own their part of the financial
control process
2. Consider the impact of financial decisions- Do
not ignore the wider impact on other depts..
3. Avoid weak budgetary control
- budgets are an active tool to make financial
decisions not merely a way to measure
performance
4. Understand the impact of cash flow
- #non financial manager should take into
account the importance of cash and the time
value of money
5. Know where the risk lies
- Eg. managers need to know where the break-
even is but also how and when it will be
reached
6. Reduce financial risk positive replies to the ff
questions would assist top management to
manage financial risk