Chapter One - A Rough Guide to Risk Management
Published online by Cambridge University Press: 18 February 2020
Summary
Every business enterprise faces risks. No enterprise can consider itself immune to the phenomenon of risk. And the spectrum of risk presents a bewildering number of threats, hazards, uncertainties ± and opportunities ± for all enterprises. All businesses therefore have to be competent in the management discipline known as risk management.
Different types of enterprise face different kinds of risks. Some risks are more prevalent in small business enterprises than large ones. The risk of shortfalls in cash flow, for example, tends to be of more concern to smaller businesses than large ones. The risk of a hostile takeover is generally of more concern to large public companies than it is to smaller ones.
The nature of the business's activities, too, shapes its risk environment. Businesses in the petrochemical sector, for example, face risks such as fire and explosion. These risks are of little concern to banking institutions, which are more concerned about credit risks, something that does not worry petrochemical companies a great deal.
Other factors such as geographic location can also shape the risk profile of the enterprise. An open-air restaurant located next to a scenic river may have a competitive advantage with its attractive setting, but may face the risk of a downturn in custom when the weather is wet and cold. Similarly an agricultural operation could have an advantage by being located next to a perennial river, but may face the risk of flooding and drought, leading to the risk of losing customers.
Some risks are determined by macro-economic factors prevalent in an economy. The possibility of an increase in the prevailing interest rate, for example, may create risk exposures for businesses that are heavily leveraged. A reduction in the interest rate could conversely threaten the earnings of those enterprises that depend on interest income for profitability, e.g. banks and insurance companies. Other macro-risks could be immediate, such as the threat of political unrest or a general strike.
Although many risks are shaped by the enterprise's unique profile, many risks also apply to almost all business enterprises. The risk of theft and fraud, for example, is usually present wherever people are employed. The risk of injury to employees, too, is usually present in a business no matter what the nature of its operations. Wherever people are involved there is inevitably the possibility of negligence, and therefore the risk of incurring legal liabilities.
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- A New Language of RiskA foundation for enterprise-wide risk management, pp. 3 - 23Publisher: University of South AfricaPrint publication year: 2002