MANAGING BUSINESS RISKS

Risk is the probability of an event occurring.

It can also be defined as an uncertain situation or series of events that, should they materialize, could impact the success of a business.

Risk Management is the systematic application of processes to identify, assess, and control risks. This is achieved through the implementation of planned responses to these risks.

Business Risk Management is a focused application of risk management, specifically addressing risks within a business’s operations, systems, and procedures.

It involves considering:

• The likelihood of a perceived threat or opportunity arising.

• The scale of its potential effect on the business’s objectives.

A Threat is an uncertain event with a potential negative impact on business goals.

An Opportunity is an uncertain event with a potential positive impact on business goals.

Types of Risks:

Types of Risks:

a) Systematic Risks:

• Also known as external risks or market risks, these affect a broad range of assets.

• They influence nearly all businesses, examples include fluctuations in interest rates, inflation, and changes in environmental regulations.

• These risks are generally beyond the direct control of business management.

b) Unsystematic Risks:

• These have a limited impact, affecting only a specific set of assets, and are sometimes termed unique or specific risks.

• Examples include employee strikes, location disadvantages, scarcity of raw materials, subpar customer service, and inadequate internal controls.

• These risks are typically manageable and within the control of business management.

c) Low Risks:

• These are minimal risks that typically do not yield significant advantages or cause substantial harm.

• Such risks often deter entrepreneurs from investing resources due to the anticipated low return.

d) Moderate (Calculated) Risks:

• These risks are predictable, quantifiable, and manageable by business owners.

• While not always desirable, they present the potential for greater rewards with an acceptable level of potential loss.

• Examples include risks like fire, theft, and burglary.

e) High Risks:

• These risks have a high probability of occurring, and if they do, control is severely limited or non-existent.

• Examples encompass activities such as smuggling and tax evasion.

Forms of Risks

Financial Risks:

• These risks can result in either financial loss or gain.

• Most businesses routinely engage in activities that carry financial risks.

• Selecting an unsuitable supplier or distributor can cause disruptions if deliveries are delayed or if the distributor fails.

• Customer relationships can also pose risks, particularly if a business becomes overly reliant on a few clients.

Employee Risk:

• While encompassing physical safety, business risk management should prioritize preventing employee-related crimes like theft and fraud.

• Human error is another significant employee-related risk, where even minor mistakes in data entry or production can lead to substantial consequences.

• Effective risk management should incorporate quality control measures for data handling and production processes to minimize the impact of employee errors.

Risk Management

Risk Management involves the identification, analysis, assessment, control, and mitigation or elimination of unacceptable risks.

Businesses can employ various strategies, including risk assumptions, risk avoidance, risk retention, risk transfer, or combinations thereof, to effectively manage potential future events.

Techniques or Methods of Managing Risks in Business:

1. Risk Transfer/Sharing: The entrepreneur shifts the potential loss to another party. For instance, insurance companies assume this role, incurring losses when insured events occur.

2. Risk Avoidance: Entrepreneurs implement preventative measures to stop risks from happening. Examples include quality control systems to prevent substandard products and timely tax payments to avoid penalties.

3. Risk Reduction/Mitigation: Acknowledging that some risks are unavoidable, entrepreneurs take steps to lessen their impact. For example, installing security features in vehicles to minimize injury from accidents.

4. Risk Retention: This involves accepting certain risks and allocating funds to cover potential losses. This approach is suitable for minor, infrequent losses, especially when insurance costs outweigh the potential loss.

5. Risk Exploitation: Entrepreneurs can leverage risks that present opportunities for gain. This involves capitalizing on chances to increase profits and sales.

The Risk Management Process

Risk management typically follows a structured five-step approach:

1. Identify the Risks: This initial step involves a comprehensive identification of all potential risks that could affect the business, considering all aspects of its operations.

2. Assess the Risks: Once risks are identified, the next step is to evaluate the likelihood of each risk occurring and the potential impact it could have on the business. This involves quantifying and prioritizing risks based on their severity and probability.

3. Develop Risk Responses: Following risk assessment, the risk manager formulates strategies to address each identified risk. These responses can include:

   • Risk Avoidance: Taking steps to prevent the risk altogether.

   • Risk Reduction: Implementing measures to minimize the impact or likelihood of the risk.

   • Risk Transfer: Shifting the risk to a third party, like through insurance.

   • Risk Acceptance: Choosing to accept the risk and its potential consequences, often for low-impact risks.

4. Implement Risk Responses: This stage involves putting the chosen risk responses into action. It requires ensuring that appropriate measures are effectively implemented to manage each risk.

5. Monitor the Risks: The final, ongoing step is continuous monitoring of risks and the effectiveness of the implemented risk responses. This involves tracking key risk indicators and making necessary adjustments to the risk management plan to ensure its continued relevance and efficacy.

Importance of Business Risk Management:

1. Business Sustainability: Risk management is crucial for preparing for and responding to emergencies, ensuring business continuity even when unexpected events occur.

2. Confidence Among Entrepreneurs: Effective risk management builds entrepreneurial confidence, particularly in sectors like logistics and transportation where goods are constantly in transit.

3. Cultivates Faithfulness: Risk management promotes trust and loyalty among business partners and stakeholders, fostering a shared commitment to managing risks effectively.

4. Employment Opportunities: The field of risk management creates job opportunities for professionals like accountants, lawyers, and insurance underwriters.

5. Proper Planning and Documentation: Risk management encourages thorough planning and documentation of business assets and associated risks, leading to better organization.

6. Facilitates Trade: Especially in international trade, risk management is vital for ensuring goods are adequately insured during transit, facilitating smoother and safer transactions.

7. Promotes Professionalism: Effective risk management instills professionalism within a business, as entrepreneurs adopt proactive and systematic approaches to managing potential issues.

8. Protects Against Risks: Risk management directly safeguards businesses against potential financial losses by implementing appropriate preventative and responsive measures.

9. Enhances Business Continuity: By transferring risks to third parties, particularly through insurance, risk management significantly contributes to ensuring business continuity and resilience.

10. Prioritization and Decision-Making: Risk management aids in setting business priorities by providing a framework for allocating resources and capital effectively, leading to improved decision-making and strategic planning.

Reasons for Poor Risk Management by Ugandan Entrepreneurs:

1. Ignorance: Many entrepreneurs are unaware of the importance and benefits of risk management, hindering its adoption.

2. Limited Finances: Some businesses may lack the financial resources needed to invest in comprehensive risk management strategies and tools.

3. Inadequate Government Policies: Government policies regarding insurance enforcement may be insufficient to strongly encourage proactive risk management within businesses.

4. Negligence: Some business owners may neglect risk management due to a lack of understanding, prioritization, or simply oversight.

5. Traditional Beliefs: Cultural norms and traditional values may lead entrepreneurs to rely on outdated risk management methods instead of adopting modern, more effective approaches.

6. Limited Insurance Firms: A potentially limited number of insurance providers in Uganda might restrict access and affordability of insurance products for businesses.

7. Excessive Compensation Procedures: Complex and lengthy insurance claim processes can discourage entrepreneurs from insuring their assets due to perceived difficulty in receiving payouts.

8. Negative Perception: Negative public perceptions or misconceptions about risk management procedures can hinder its wider acceptance and implementation within the business community.