Ozzias Villaver Jr., Ed.D. | Negosentro.com
Because we live in a world of uncertainty, how we see risk is vitally important in almost all dimensions of our life. Risk must certainly considered in making any business decisions. – Justin G. Longenecker,2006
Risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hope for. Applied to a business, risk translates into the possibility of losses associated with the assets and the earning potential of the firm. Here, the term assets includes not only inventory and equipment but also such factors as the firm’s employees and its reputation.
Managing risk aims to preserve the assets and earning power of the business. Its min concern is to find ways the best way to reduce the cost of handling risk.
Here are some risk-management tips to sustain the assets and earning power of the company.
Identify risks. Adopt a systematic approach to identify pure risks. With methods like insurance policy-checklists, questionnaires, analysis of financial statements and the operation of the company.
Evaluate risks. Once risks have been identified, an evaluation of the possible losses and the probability of its occurrence. Such risked can be classified into three groups: critical (loss could result in bankruptcy); important (loss would require investment of additional capital to continue operations); and, unimportant (loss could easily be covered with current income or existing assets).
Select methods to manage risk. Two approaches to deal with risks, the risk control which minimizes a loss through prevention (i.e. stopping loss from happening), avoidance which does not engage in a hazardous activity, and reduction that checks the potential amount, severity and unexpected losses. The other approach is risk financing which uses available funds for losses. This involves transferring the risk through buying of insurance or retaining the risk through operating revenues or retained earnings. A common example of risk retention is self-insurance.
Implement the decision. Once the decision has been made, it must be followed by action such as availing an insurance and/or set aside funds to be used for unpredictable risk.
Evaluate and review. This final approach in managing risk is essentially very important since conditions change – new risks arise and so old ones cease. By using specific new methods the firm may be able to identify the past errors.
Consequently, “in choosing the appropriate method for managing risk, the small business own should consider the size of each potential loss, its probability of occurrence, and what resources would be available to cover the loss if it did occur.”
(Reference: Justin G. Longenecker et at. Small Business Management.Ohio, USA,Thomson-South-Western, @ 2006)