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Chapter 2

Why Manage Risk?

In this chapter Why do businesses fail? There


are 7 primary reasons:
 Promoting company strengths
and profits  Financial Failure. There are
 Understanding why businesses several types of financial failure
fail but for most businesses, it
 Growing the upside and usually amounts to the inability to
protecting the downside manage cash flow. This may be
due to a variety of issues
If risk is as much a part of daily straining your cash a specific
business life as, say, breathing, obligation that can’t be covered
then why manage it? The quick or simply poor accounting or
answer by managing risk we can fiscal management practices.
either avoid the events that lead  Strategic inability to compete.
to loss or reduce the amount of Competitors with better product
loss when those events occur. and greater ability to reach the
Owners can bring principles and customer often force out longer-
systematic processes into their standing less aggressive
businesses that help them make companies
the decisions necessary to  Merger or takeover. Competitors
ensure the best possible outcome often swallow up companies by
no matter the situation. These buying the business or top
risk management processes also product lines or merging the
help owners make critical company into their own.
decisions in day to day operation.  Force majeure. This is the God
Forbid reason many businesses
What kills Companies? fail because of natural disaster
such as tornadoes, hurricanes,
Bookshelves from here to the floods, and fire, in some countries
nearest business school are filled war is also a major business risk
with well-crafted books on how to  Fraud. Roughly one third of
succeed in business. But despite businesses that fail do so
the combined knowledge of because of fraud embezzlement
centuries of business, 33% of all by employees cooking the books
business start-ups fail within two to suit auditors and shareholders,
years and 56% fail within 4 years. and other misuses of money.
 Loss of key supplier. only ruin decision makers days but are
Businesses that lose key supplier often caused by major systematic
risk losing quality control and breakdowns that can set a business
customer satisfaction. back days, weeks, or Months.
 Loss of key Customer.
Reduced Earnings Volatility
Businesses that rely on a few
large customers for most of their Investors might not own businesses
income face major risk of failure if outright, but they have the right idea
a customer or key channel for when it comes to profit flows they seek
acquiring customers, moves on. stability and predictability. They steer
away from the sharp ups and down of
Protect that Downside!
high earning volatility.
The promotional side of business
 Earnings Volatility
focuses on the upside that lofty place
Is the ebb and flow of a
where your dreams, projection, revenue
business’s earnings over week,
indicators, and future business plans
quarters, or years high earnings
meet with a receptive marketplace, It is
volatility can put your business at
easy to feed energy into the upside to
risk in a number of ways. Low
keep investing and planning for a
earnings volatility suggests
successful future.
stability and long-term strength.
Fewer Fires to Fight
Reduces Budget Blowouts
Something comes up an emergency fill Budget blowouts are particularly
in order a sudden visit from a quality troublesome because they seize
control inspector, an unplanned up entire departments or
machine maintenance an unanticipated operation. Risk management
drop in crucial inventory these situations helps companies understand
are fires that require everyone’s where weaknesses lurk enabling
immediate attention and resources. them to take steps to prevent
They create strain within your company them.
and with suppliers and paralyze the flow Protection of Assets
of your business  Business assets consist of key
Fewer Management Surprises physical items that drive any
business forward. The three most
Nothing quite sucks the wind out of a critical asset categories are as
satisfied manager or owner’s sails faster follows:
than discovering a major operation  Financial
problem, a cash flow problem or worst  Equipment
yet a pure loss of money surprise  Personnel
unfortunately these type of surprise not
When any of these assets falter, decision-making manpower on
the business falters. identifying and assessing
Consequently, business owners opportunities in the marketplace.
must protect the downside of all The business can be more
three assets and they must do so responsive to request for
in two ways: as they pertain to proposals or the opening new
the bottom line and as a matter of accounts. With added time and
safety. the security of knowing risks have
been handled, owners and
More Efficient Issues salespeople can focus on the
Resolution better understanding how to
When something happen to your respond to specific opportunities.
business, good risk management This enables the business to
speeds up the process of finding grow and thrive.
efficient and specific approach for
identifying and resolving key Improved Returns Relative to
issues.it also provides the means Risk
of evaluating the best options for
mitigating the situation. When By being able to assess risk more
something happens, it is vital to formally on the upside, as well as
find the best solution quickly and the downside, companies can
to implement it without delay better understand where and how
they are achieving returns. They
Grow the Upside can accurately project how much
No one enters business to focus return is needed to support the
on the downside, winning new risk they are taking as part of a
project, landing new customers, business growth operation.
expanding skills and operation, Potentially it is far better to spend
hitting profit and revenue money mitigating the effect of a
projections, and building an even known risk than paying to clean
greater upside. up the damage of a unknown risk
after it hits.
Improve Competitiveness
One of risk management’s Improved Efficiencies and
greatest unsung benefits is the Quality
increased competitive edge it When risk is factored into
gives businesses. With risks business planning and operation,
identified, and either avoided or the business tends to becomes
mitigated, companies can focus more efficient and provide higher-
more resources, time and quality products and services.
Resources, time, and better
process monitoring techniques
can be applied to making better
products or improving
Improved Communication Reduced Fines and
One of the greatest upside of risk Compliance Costs
management is its ability to Schedules, reviews, filling, and
increase quality communication other key dates often get lost in
in the workplace. Company-wide the hustle and bustle or daily
knowledge of the business’s risk business. A risk management
management strategy generates plan will turn these into priority
company0wide communication. items, resulting in fewer missed
This communication helps deadlines and overlooked
everyone understand the issues requirements, thereby minimizing
in the same way and enhances the risk or being fined, failing to
further insight through informed apply for appropriate licenses
problem-solving and so on.

Increased Employee Reduced Consequences


Confidence It is crucial to reduce the
When risk is being managed at a consequences of failed financial
company, and he the rank and obligations. If a company misses
file know it employees feel a just one critical financial
greater sense of security. When obligation, the door can literally
workers know that the company close next month or tomorrow. If
leadership is looking out for you don’t make payroll or delay
pitfalls, their confidence in the payment for example, employees
company and their jobs within the may walk. If you don’t take a
company grows. Employees may credit payment, bank may call the
also feel empowered to improve loan. A bond call can shut down a
their skills for managing risk company within a couple of
issues that come up in their own weeks that’s what happened to
departments and to learn more Enron. A market call has the
about how management is same impact, since all trading
dealing with issues. This with the company will be
increases their confidence even suspended. When you can’t pay
more creating a stronger and a supplier, it won’t be long before
more dedicated workforce. that supplier stops shipping
critical material to you.
Reduce Litigation Reduce Business Interruptions
A well-managed business that Risky situations almost always
knows its current and potential slow down company processes.
short and long-term risks and They can mean interrupting a
acts upon them is less likely to sit sales manager for three critical
on either side of the litigation selling hours or shutting down an
fence. Disputes between the assembly line because a
company and suppliers, financially strapped supplier sent
customers, regulators and other watered-down materials to
authorities will be reduces and stretch their inventory. The key to
when dispute do arise you’ll have risk management is to build just
clear well organized enough measures and systems
documentation to back up your into place so that ideally noting
company’s claim the expensive will shut down or be interrupted.
reputation-threatening decision to Every time an incident occurs
litigate can be replaced by that takes an employee or
mitigating the situation. employees away from their jobs,
causes a delay in production. Or
Reduced Insurance Costs makes it impossible to supply a
With fewer and smaller incidents new product time and the
comes a perceived increase in opportunity to sell are lost to the
company safety and reliability by business. The company loses
the insurance industry, money in two ways: from the lost
consequently managing risk well wages of employees who had to
often leads directly to lower deal with the situation and from
insurance costs lost potential sales the less these
incidents occur, and the faster
normal operations.