Risk Management Flashcards
(18 cards)
Define risk management
Risk management is the process of understanding and minimising what might go wrong in an organisation. 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.
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.
- At the end of this risk management process, the business should have a comprehensive list of risks attached to the business. This list will form the basis for a risk register (the formal record of risks and their potential impact). 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:
- train staff appropriately
- regular backup of IT system
- put robust quality control systems in place.
Explain risk management strategies
Risk management strategies include taking out insurance against financial loss or legal liability and introducing safety or security measures. Sometimes external bodies are involved in
measuring and managing risk, e.g. the Bank of England and the Financial Services Authority have taken a great deal of interest in the levels of risk carried by banks.
Define a 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.
At times, businesses may face crises; these are situations where unstable conditions exist. As a result, problems can occur. Crises are usually unexpected. Effective planning should reduce the impact of a crisis on a business.
Types of risk
Financial – For example, cash flow problems due to money needed to be spent on raw materials now when payment for a completed order is not due for another month.
Production – The breakdown of a crucial piece of machinery. This would lead to a loss of production and a failure to deliver products on
time.
Human Resources –ex. industrial action taken by employees (which
could include strikes). Production may be halted and sales may suffer.
Environmental – A business’ operations may lead to environmental damage which might cause pressure groups to take action, such as organising a boycott of the business’ products.
Product – A faulty or dangerous product could lead to a total recall of a batch of the products.
Legal – For instance, a product that broke the law because it did not comply with minimum safety standards would have to be withdrawn and new research and development carried out.
Quantifiable Risk
Those that can be measured,
such as a potential loss of overseas sales due to
an increase in the exchange rate.
- 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
Examples of quantifiable risk
- Financial Risk – The probability that a major customer becomes bankrupt and does not pay money owed to a supplier
- Operational Risk – The breakdown of key equipment or machinery
- Strategic Risk – A new competitor coming on to the market
- Compliance Risk – Responding to the introduction of new health and safety legislation.
Unquantifiable risk
Cannot be measured, such as the
adverse effect on a company’s image if a product is not successful. - difficult to ensure
Examples of unquantifiable risks
- The adverse effect on the business’ reputation if there is a major failure in quality control or if a major brand has to be withdrawn because it is affected by a health scare.
- Market rejection of one of its new proposed brands.
- The effect of external factors, such as a recession.
- The impact of rapid expansion on staff morale.
Steps that it could take to minimise the risks might include:
- look for alternative supplies of raw materials
- hedge currencies
- introduce rigorous quality control procedures
- train the workforce to deal with anticipated problems, e.g. in health and safety procedures.
Reasons for contingency plan
√ Businesses face many risks, both quantifiable and unquantifiable.
√ By having a contingency plan, a business will be prepared for any eventuality that may occur.
√ This may save the business time and money in the long run.
Reasons against contingency plan
X Contingency planning may be expensive and time-consuming to carry out.
X Unexpected events may still occur, since it is virtually impossible to plan for every possible outcome.
Define contingency plan
A contingency plan is a plan devised for an outcome other than in the usual (expected) plan. It is often used for risk management when an exceptional risk that, though unlikely, would have catastrophic consequences. The aim of contingency planning is to minimise the impact of an unforeseeable event and to plan for how the business will resume normal operations after the event.
- The greater the likelihood of an event happening and the greater the potential damage if it does occur, the more likely a business is to plan for it.
Examples of contingency planning are
- fire practices
- keeping back-up copies of data from computers
- planning for a situation in which a competitor makes a take-over bid
- having back-up plans in case there are problems with suppliers.
To decide which events to plan for, a business will consider:
- How likely is a particular event to happen?
- What is the potential damage if it does occur?
Examples of crises for which contingency plans might be drawn up are:
- a situation where a food producer’s products are contaminated and it has to recall them
- industrial action (such as a strike) or high levels of staff turnover in a business (when staff do not remain very long working for a business).
Businesses need to be prepared for the unexpected. - Contingency Plan
A business cannot prepare for every emergency, but it is worth highlighting the biggest risks and preparing for these. However, contingency plans must not affect the corporate plans of the business. Keeping a large amount in a contingency fund, for example, may reduce the funds that the business has available for expansion or investment. Managers must be proactive – anticipating and preparing for change – rather than reactive – having to react to crises as they develop
