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Question
This video introduces the concept of business risk and risk management. It notes that business risks can generally be classified into four categories: property, market, employee, and customer.
Using each of the four categories of risk, develop an analysis of how financial management techniques or policies can be used to mitigate each of the risks. Summarize your findings in a three page paper
Please be original.
Explanation / Answer
Introduction
Survival of business largely depends on the level of risk it operates in. Risks vary from one industry to the other and with different magnitudes. The risks that a business faces can generate from within that business or can be generated by external factors outside the business. Any factor that threatens or may threaten the performance and well being of the business qualifies to be a risk. Once a risk is identified, adequate measures should be put in place so as to minimize the risk or eliminate the risk (Fernando, 2011).
Business risk affects the operations of a business since the finances that should cater for its expenses are negatively affected. In some cases, the cash flowing in the business goes far below the business costs. A business risk can be the one where a down swing is experiences in the whole economy thus affecting all the businesses across that economy. On the other hand, a risk may involve a certain business or line of businesses in a given economy. The former is referred to as a systematic risk and the latter is an unsystematic risk. However, business risk should be differentiated from financial risk although the two relates to some point. It is not worth finacial risk is related to operation of a business where the cash flow is unable to meet financial obligations of that business.
Any risk should be minimized regardless of its magnitude since the level of business risk affects the worth of that business (John, 2011).
Types of business risk
Generally, business risks can be classified into customer, employee, market and property risk but the risks are not only limited to the ones stated. Variation arises from one business to the other and form one industry to the other when quantifying these risks. Every business has its own risks associated to it but the level of risks should be maintained at the lowest level possible.
Employees are very important to the running and success of a business. Most businesses even invest more in human capital development because skilled employees are assets in terms of knowledge. However, same employees pose a risk to the business. Employees can in the process of work engage in retrogressive acts such as theft, industrial actions, falling sick, incompetence, and negligence among others. Business can be hurt by these events resulting from employees leading either to a recession or closure of the business.
Change in conditions already prevailing in the market form a market risk for that business. Economic conditions may lower the demand of products produced by the business, prices can fluctuate depending on inflation rate, consumers can shift to substitutes and influx of competitors into the industry may go high. These factors threaten the survival of business and well calculated strategies should be put in place in order to remain at a competitive edge. The dynamic risks is biggest challenge which are s a result of dynamics of the economy are highly unpredictable and can hit the market of a business unexpectedly (Jonathan, 2012).
Business property can be held in form of real estates, bonds and other securities. Substantial amount of money lies in the business property hence it is material to take more caution on business property. Business property are faced with risks such as floods, theft, fire break outs, legal issues, conning in the process of buying, rental income loss among others (John, 2011).
Talking to a customer is a risky. During the time when you are talking with the customer, you can lose that customer or you can win more customers. Customer business risk entails losing customers because of dissatisfaction or loss of loyalty.
Managing business risk
Risk associated to the employees can be managed through measures such as transfers, disciplinary actions and motivational talks. In addition, a plan can be put in place where employees sign to the expected code of conduct, the standards they are expected to maintain and the level of performance expected so as to achieve the objective of the business (Byrd, Hickman and McPherson, 2013).
Market risk can be countered through extensive research, innovation, product rebranding, increased level of advertisement. Another strategy that can be used is the price-lead strategy where the business undercuts the prices offered by competitors. Incentives and product development can also help in locking in the customers who are loyal to the products offered by the business.
Property asset loss can be prevented by taking insuring the property against any unforeseen predicament. Moreover, all the aid down legal procedures should be followed to avoid chances of controversy during the acquisition and selling process. Security of the property should also be maintained either through systematic audits or through physical protection.
Being different in handling customers and offering unique products is a strong tool in managing customer risk. In business, the secret to success is customer loyalty in the exiting customers. Of great importance is maintaining an existing customer although new customers should not be neglected (Jonathan, 2012).
In conclusion, it is very healthy for businesses to understand their risks. Besides, these risks should be analyzed and quantified so as to establish the best strategy to manage each risk.
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