BUSINESS PLAN

What is a business plan?

A business plan is a written document that:-
(i) describes the goals and objectives of the business, how and when they will be
achieved
(ii) Shows the structured guidelines on achieving a business goal
(iii) Gives a road map to owning and operating business
(iv) Acts as a proposal describing a business opportunity for financing agencies.
(v) Spells out the operations of a business.
Why write a business plan?
(i) To obtain financing
(ii) To guide in a business operation
(iii) To guide in managing a business
(iv) It communicates clearly to the interested parties
(v) It is a marketing tool for the business
When is it written?
(i) After one decides to go into business
(ii) Before starting the business
(iii) When an entrepreneur wants to expand the business and updating is required
(iv) Whenever it is required.

TYPES OF BUSINESS PLANS

(i) For retail business

(ii) For wholesale business
(iii) For services business
(iv) For menu business
(v) For any other type of business
(vi) For academic purposes.

Who writes the business plan?

(i) Each prospective business owner/manager when he/she intends to open a business
(ii) A support agency may assist in writing certain areas of the business plan
(iii) A consultant/expert
(iv) A student during the course of study

How to write a business plan

(i) By identifying all the questions that could be collected relating to the business
(ii) By determining what further information needs to be gathered to answer all the
questions
(iii) By comparing various alternatives
(iv) By making a decision on each question
(v) By involving experts
Sources of information for a business plan
(i) From the customers
(ii) From the consumers
(iii) From suppliers
(iv) From carrying out a survey
(v) From your trainer/consultant/mentor

Benefits of a Business Plan

(i) It’s a financial tool that provides information if one wants to obtain a loan
(ii) It enables potential entrepreneurs to assess the viability of their business opportunities
on paper
(iii) It forces entrepreneurs to establish written goals and objectives for the proposed
business
(iv) It establishes the financial need of a business and suggests the possible sources of
financing
(v) It tests ideas on paper
(vi) It indicates the owners’ ability and commitment
(vii) It’s a blueprint or guideline

Qualities of a Good Business Plan

1. Simplicity and clarity – in order for a business plan to attract and be motivating to the
reader, it should be:
(i) Be simple
(ii) Sentences should flow logically
(iii) Each sentence should have one idea
2. Brevity – it should be brief and to the point
3. Logic – ideas should follow one another logically with paragraphs connecting one to the
other
4. Truth – one needs to be frank and not overstating the facts/originality/innovative
5. Use of figures – words should be backed by figures especially in financial plan

Preliminary pages of a Business plan

Sample Cover Page

Name of the business:
P.O Box…………….
Telephone
Email
Logo
Business Plan:

Presented by…………
Admission Number
Presented to……………… (Name of the Institution)
Date
ii.Declaration
I hereby declare that the business plan is my original work and that it has not been presented for
the award of a degree or diploma to any institution.

Name …………………………………………………………..
Admin No ……………………………………………………...
Signature ……………………….. Date ………………………

Supervisor Name……………………………………………….
Signature ……………………….. Date ……………………….

iii.Acknowledgement
Acknowledge: Lectures, Institutions and employer for their financial and moral support.
I wish to acknowledge the following people who assisted me in ensuring that the business project
report was successfully done

iv.Dedication
You dedicate to the relevant person(s) or institution. The dedication is normally short probably a
sentence or two
Expresses the heartfelt honor or sweet words that has been special to the life of a project writer.

v.Table of Contents
A table of contents is an organized listing of your document's chapters, sections and, often,
figures, clearly labeled by page number. ... The table of contents should list all front matter,
main content and back matter, including the headings and page numbers of all chapters and the
bibliography.

Components of a Business Plan

A business plan should have the following chapters
1. An executive summary
2. Business description
3. Marketing plan
4. Organization and management plan
5. Production/operational plan
6. Financial plan
7. Risk plan
Vii Executive Summary
An executive summary is a brief introduction and summary of your business plan. A good
executive summary grabs your reader’s attention and lets them know what it is you do and why
they should read the rest of your business plan or proposal. It’s not unusual for investors to make
an initial decision just based on reading an executive summary, so it’s important to write an
executive summary that sets your business plan apart from the rest. An executive summary is
necessary as many people will read only the summary
Others will read the summary first to decide whether or not they read the rest of the plan. The
executive summary is essential in plans that are being written for outsiders. 

It takes some effort to do a good summary, so if you don’t have a business use for the summary,
don’t do it. 

It should include:
i. Business description
ii. Marketing plan
iii. Marketing and organizational plan
iv. Production and operational plan
v. Financial plan
vi. Critical risk analysis

CHAPTER ONE: BUSINESS DESCRIPTION

This should include:

Introduction: Background of the owner – this is where the details concerning the owner of the
business are included e.g. name(s), age, marital status, address, occupation, education,
professional qualifications and business experience.
Vision- picture, mental image of what you want your business to be in the future. Helps to give
you direction ant focus.vision is usually based on your goals and objectives.talks about the
future while mission talks about now. It guides the company strategic plan. May not be too long,
but should be motivating to the employees.
Mission- business reason for existence, describes the purpose and the overall intention of the
enterprise. The mission supports the vision and communicates to the stakeholders,employees,
vendors and customers.
1.1 Business Name-:
 It means the name of the business
 Need to describe how the name was selected
 One needs to come up with a logo of the business
 Logo identifies the business
1.2 Business location and address-:
 Where the business will be located, the place and also the site
 Location is general
 Site is specific
 Include a map of the location
 Physical address of business including email and website
1.3 Form of ownership:- this may include
 Sole proprietorship
 Partnership
 Private/public company
 Co-operatives
 Reasons for the choice of ownership
  Advantages and disadvantages to show that you understand the business you
are going to start
1.4 Type and status of the proposed business:-
 Whether the business is a start-up or ongoing
 Activities of the business
1.5 Products and Services:-
 The types of products you are going to offer
 Describe clearly and include features of products and services e.g. indicate
size, color, shape, materials, quality, packaging of the product
 The benefits customers will obtain from using your products/services e.g.
consider the performance, convenience, economy, comfort, durability, usage,
flexibility, servicing, warranties etc.
 Uniqueness- ow will you differentiate your business from others.
1.6 Justification of opportunity – the reasons for choosing that kind of business e.g. exploit
resources, nutritional value of opportunity, niche market, technology advancement,
professional qualifications, unmet demand, climate favorable, infrastructure and security.
1.7 Industry:-
 The type of industry that your proposed business belong to e.g. a matatu
belongs to transport industry, consider the total number of firms or
competitors in that industry.
 Brief history of the industry and the size.
 The industry’s trend e.g. whether the industry is growing, declining or stable.
 Industry characteristics i.e. capital requirements and kind of technology in that
industry, and labor requirements.
1.8 Goals/Objectives of the Business
Goals: - what does the business want to achieve in the long term e.g. to become a
quality leader, market leader, the entrepreneur must penetrate in the other markets
Objectives: - what does the business want to achieve in the short term e.g. to
maximize profits, increase sales, minimize costs.
1.9 Entry and Growth Strategy-
 It means how you will penetrate and gain acceptance in the market
 Need to consider the competitive advantages among competitors, pricing and
distribution, advertisement or promotional methods.
1.9.1 Entry Plan:
i. Competitive advantages of the business is what your business should have
compared to competitors
ii. Weaknesses of the competitors
iii. Pricing plan – how you will set your prices for your goods
iv. Plans to attract consumers – methods you are going to use.
1.9.2 Growth Plan:
i. Trends which signal business growth/signs of business growth
ii. Opportunities coming from the trends/prevailing opportunities
iii. Plans to take advantage of the opportunities
CHAPTER TWO: MARKETING PLAN

2.1 Customer: As an entrepreneur, one should;

 Understand the potential or current customers in order to determine who your customers
are e.g. wholesalers, retailers, user/individuals, households and institutions like schools,
hospitals, and churches.
 Determine the location of your customers e.g. how many they are and their location in
terms of income, age, size, education, occupation etc.
 Understand what your customers will be looking for in your products or services for
example:
i. Production consideration/characteristics e.g. price, quality, appearance, color, shape,
material, size – weight, volume and efficiency
ii. Business considerations
o Advertisement and promotion
o Variety of goods and services
o Credit facilities
o Capability of employees
o Method of selling

2.2 Market share/size: This is the amount of unit sales e.g. what is your estimated expected
sales in units per month, quarterly or even yearly. In estimating the market size, an entrepreneur
needs to list down the businesses selling similar products in the market.

2.3 Competition
As an entrepreneur, one should keep an eye on the other competitors in the market and;
 Consider what they are doing
 Analyze factors that have contributed to their success or failure
 Determine if there are gaps to be filled
 Determine your competitors’ potential and their size in terms of assets, sales volume and
market share
 Determine the strengths and weaknesses of the competitors
 Plan to capitalize on the weaknesses of the competitors

2.4 Methods of promotion and advertisement

Consider;
 Media to use e.g. electronic and or print media
  How to portray your products. What image to project in the mind of consumers
 How often to advertise your products or services
 How much each advertisement will cost
 How to measure the effectiveness of your advertisement
 What promotion campaign to undertake when introducing the product or service e.g. free
samples or free introductory services
 What promotional methods to employ on regular basis e.g. trade shows, sponsorships of
competitions and the cost of promotion per event
 How to measure the effectiveness of your promotional campaigns

2.5 Pricing Strategy

When setting the prices of your product or service,
 The methods of calculating the selling price for your products or services
 Factors which will influence your price setting to include:-
1. Income of the clients targeted
2. Prevailing market prices
3. Cost of raw materials
4. Nature of competition
 Actual selling prices of products and services
 Credit terms to be offered e.g.
1. The kind of credit to give to your loyal customers
2. When to offer credit
3. When will your customers pay back?
 Discounts to offer i.e.
1. Cash discount when one pays promptly
2. Trade discount when one buys in large quantities
 Any after sales services – offered after purchase e.g. transport, warranty, installation etc.

2.6 Sales Tactics

Consider;
 The selling tactics you will employ e.g. direct/personal selling or selling indirectly
through an agent
 If you intend to sell indirectly to the customers, how to recruit, retain and remunerate
your sales force
 If you intend to sell to the distributors or agents, how to select and motivate them e.g. you
can use middlemen already used by many competitors and with high reputation. Motivate
the middlemen by giving them high profit margins.
 Which geographical areas your agents will cover.

Distribution Strategy
 How to get your products to reach your customers e.g. through sales representatives,
wholesalers or distributors
 What means of transport to use e.g. road, rail, air etc.
 How much the chosen means of transport costs you per month or for a given period of
time
  What specific distribution problems to anticipate
 How to solve the problems anticipated

CHAPTER THREE: ORGANIZATION/ MANAGEMENT PLAN

3.1Organization structure: This is a system that outlines the various levels in the organization.
It also shows the direction of the communication in the organization. Draw the a chart for your
business

Organization chart

Managing Director

Human Resource
Manager

Finance Manager Marketing Manager Procurement Manager

This chart does not include all the levels of workers in an organization

3.2 Management team: Any business or organization should include the following in its
operation.
3.2.1 Owner manager and members of the management e.g. Human Resource Manager,
Managing Director, Production Manager, Marketing Manager, Finance Manager etc.
A description of each of the above managers should be stated to include;
 Duties and responsibilities
 Academic qualifications depending on the nature of business
 Work experience
3.2.2 Key personnel. This comprises of the key staff other than the managers
3.2.3 Other personnel: this will include other employees who are not in the management team
e.g. Accountant, Sales Representative, and Security Officer Etc. A description of their academic
qualifications, duties and number of employees should be included.

3.3 Recruitment, Training and Promotion

3, 3.1Recruitment
One need to describe how managers and other personnel will be recruited. For the management
team, one can use the following ways/methods;
 Poaching
 Advertisement
 Recruitment agencies
 Word of mouths

3.3.2Training
 Induction training should be given to the newly employed staff and also for those who are
promoted
 On the job training should also be given
 Off the job training that include workshops and seminars for the staff

3.3.3 Promotion
Promotion of personnel should be based on evaluation/merit, after training and attaining
qualifications and experience.

3.4 Remuneration and Incentives

3.4.1 Remuneration refers to a package/salary that an employee gets at the end of the month
while
3.4.2 Incentives are packages given to an employee to motivate or encourage them to work e.g.
bonuses, commission, lunch, tea, overtime allowance.

3.5 Support Services

The business will require support services to enable it carry out its operations effectively. These
services will include:
Banking services
 The bank to open an account with and the branch
 Type of account
 Purpose of account
Insurance services
 A firm to insure your business
 What you want to insure the business against
 How much it is likely to cost you to insure the business
Consulting services
Indicate who will be your consultant and the kind of advice expected as far as the business is
concerned.

CHAPTER FOUR: PRODUCTION/OPERATION PLAN

4.0 Production planning is the act of developing a guide for the design and production of a
given product or service. It helps organizations make the production process as efficient as
possible.
Production planning is important because it creates an efficient process for production according
to customer and organizational needs. It optimizes both customer-dependent processes -- such as
on-time delivery -- and customer-independent processes, such as production cycle time.

A good production plan minimizes lead time, which is the amount of time that passes between
the placing of an order and the completion and delivery of that order.

4.1 Facility and capacity

 Identify the facilities that you will need to produce
 They include machines, stationary, tools, equipment and furniture
 Plan layout of your office or workshop.
4.2 production strategy
 Show the plan of action.
 How will you plan to be efficient?
 Raw materials, cost of labor, skills that you need.

4.3 Production planning process

 Step by step process

 Show the diagram

 Factors that affect production (both external and internal)

 Discuss the solutions

4.4 Rules and regulation

4.4.1 Legal services – these services will be required when writing contracts, drafting legal
letters, interpreting labor laws and employment.
Indicate the legal firm and the lawyers.
Indicate the registered office.
4.4.2 Licenses: any business needs a license in order to start trading. One should think where to
get the license and how much it will cost. State the purpose of the trading license. te who will be
your consultant and the kind of advice expected as far as the business is concerned.
4.4.3 Permits: a permit is also a necessity depending on the nature of the business e.g. milk
business will need a permit from Kenya Dairy Board, for beer – Kenya Liquor Licensing Board,
for school – the Ministry of Education or District Education Board.
4.4.4 By-Laws: the business will need to comply with the by-laws issued by: county council,
municipal council or city council for it to run smoothly.

FINANCIAL PLAN
The financial plan comprises analyzing financial requirements or business and developing
financial plans.
Objectives of financial plan
 Maintain a healthy liquidity position throughout the trading period
 Maintain return on owners’ equity e.g. at 25%
 Realize a steady growth on income throughout the period
 Maintain and control expenses
 Maintain an effective accounting system
Financial Assumptions
 The expenses are expected to rise by for example 5% as business operations expand
 Creditors are to be increased by a certain percentage per year
 Debtors are to increase by a certain percentage per year
 Net profit is expected to increase by a certain percentage per annum
 Net profit realized would be ploughed back to the business so as to expand the business.
5.1Pre-operational costs: - this is the cost incurred before the start of a business
Common examples of pre-operating expenses include:
 Recruitment and training of staff before opening.
 Market research.
 Site visits.
 Regulatory expenses (e.g. permits, licenses)
 Administrative expenses (e.g. office rental, stationery)
 Tuition for training programs, seminars, and other educational services.

5.2 Working Capital

Working capital, also known as net working capital (NWC), is the difference between a
company’s current assets—such as cash, accounts receivable/customers’ unpaid bills, and
inventories of raw materials and finished goods—and its current liabilities, such as accounts
payable and debts.

5.3 Pro-forma Balance Sheet

This is a financial statement that shows the financial position of the business for a certain period
of time (usually one year).
5.4 Income statement/Profit and Loss Account
It indicates how the revenues are transformed into the net income or net profit.

5.5 Cash Flow Statement

The statement of cash flows, or the cash flow statement (CFS), is a financial statement that
summarizes the amount of cash and cash equivalents entering and leaving a company. Like the
income statement, it also measures the performance of a company over a period of time.
However, it differs because it is not as easily manipulated by the timing of non-cash transactions.

5.6 Break-even Analysis

It entails calculating and examining the margin of safety for an entity based on the revenues
collected and associated costs. In other words, the analysis shows how many sales it takes to pay
for the cost of doing business.
To calculate the break-even point in units use the formula: Break-Even point (units) = Fixed
Costs ÷ (Sales price per unit – Variable costs per unit) or in sales dollars using the formula:
Break-Even point (sales dollars) = Fixed Costs ÷ Contribution Margin.

5.7 Desired Financing

Define the type of funding that will suit your business: debt/equity, or non-traditional financing.
Clearly state how the capital will be obtained; from whom, how much, and terms.

5.8 Capital Structure

It refers to the specific mix of debt and equity used to finance a company's assets and
operations. ... A company's capital structure is the result of such financing decisions that may be
guided by capital structure policies or targets set by management and the board.

5.9 Profitability Ratios

Profitability ratios determine the ability of the company to generate profits as against: (i) Sales,
(ii) Operating Costs, (iii) Assets and (iv) Shareholder's Equity. This means such ratios reveal
how well a company makes use of its assets to generate profitability and create value for
shareholders.

Examples of profitability ratios:

i. Gross Profit Ratio.
ii. Operating Ratio.
iii. Operating Profit Ratio.
iv. Net Profit Ratio.
v. Return on Investment.

CHAPTER SIX: RISK MANAGEMENT

RISK ANALYSIS AND MANAGEMENT

What is a risk? A risk can be defined as an event or circumstance that has a negative effect on
your business, for example, the risk of having equipment or money stolen as a result of poor
security procedures. Types of risk vary from business to business.

The most common business risk categories are:

1. Strategic Risk–decisions concerning your business’ objectives. Everyone knows that a

successful business needs a comprehensive, well-thought-out business plan. But it’s also a fact of
life that things change, and your best-laid plans can sometimes come to look very outdated, very
quickly. This is strategic risk. It’s the risk that your company’s strategy becomes less effective
and your company struggles to reach its goals as a result. It could be due to technological
changes, a powerful new competitor entering the market, shifts in customer demand, spikes in
the costs of raw materials, or any number of other large-scale changes.

2. Compliance Risk –the need to comply with laws, regulations, standards and codes of practice.
Are you complying with all the necessary laws and regulations that apply to your business?

Laws change all the time, and there’s always a risk that you’ll face additional regulations in the
future. And as your own business expands, you might find yourself needing to comply with new
rules that didn’t apply to you before.

3. Financial Risk –financial transactions, systems and structure of your business. Most
categories of risk have a financial impact, in terms of extra costs or lost revenue. Financial risk
refers specifically to the money flowing in and out of your business, and the possibility of a
sudden financial loss. For example, let’s say that a large proportion of your revenue comes from
a single large client, and you extend 60 days credit to that client. In that case, you have a
significant financial risk. If that customer is unable to pay, or delays payment for whatever
reason, then your business is in big trouble. Having a lot of debt also increases your financial
risk, particularly if a lot of it is short-term debt that’s due in the near future.

4. Operational Risk –your operational and administrative procedures. i.e. an unexpected failure
in your company’s day-to-day operations. It could be a technical failure, like a server outage, or
it could be caused by your people or processes. In some cases, operational risk has more than one
cause. For example, consider the risk that one of your employees writes the wrong amount on a
check, paying out $100,000 instead of $10,000 from your account. That’s a “people” failure, but
also a “process” failure. It could have been prevented by having a more secure payment process,
for example having a second member of staff authorize every major payment, or using an
electronic system that would flag unusual amounts for review.

In some cases, operational risk can also stem from events outside your control, such as a natural
disaster, or a power cut, or a problem with your website host. Anything that interrupts your
company’s core operations comes under the category of operational risk.
5. Reputational Risk –the character or goodwill of the business. If your reputation is damaged,
you’ll see an immediate loss of revenue, as customers become wary of doing business with you.
But there are other effects, too. Your employees may get demoralized and even decide to leave.
You may find it hard to hire good replacements, as potential candidates have heard about your
bad reputation and don’t want to join your firm. Suppliers may start to offer you less favorable
terms. Advertisers, sponsors or other partners may decide that they no longer want to be
associated with you.

Reputational risk can take the form of a major lawsuit, an embarrassing product recall, negative
publicity about you or your staff, or high-profile criticism of your products or services. And
these days, it doesn’t even take a major event to cause reputational damage; it could be a slow
death by a thousand negative tweets and online product reviews.

6. Environmental Risk –external events that the business has little control over such as
unfavorable weather or economic conditions. Employees should be familiar with the streets
leading in and out of the neighborhood on all sides of the place of business. Individuals should
keep sufficient fuel in their vehicles to drive out of and away from the area. Liability or property
and casualty insurance are often used to transfer the financial burden of location risks to a third-
party or a business insurance company.

Others include health and safety, project, equipment, security, technology, stakeholder
management and service delivery.

Risk Analysis is a process that helps you to identify and manage potential problems that could
undermine key business initiatives or projects. To carry out a Risk Analysis, you must first
identify the possible threats that you face, then estimate their likely impacts if they were to
happen, and finally estimate the likelihood that these threats will materialize.

When to Use Risk Analysis

Risk analysis is useful in many situations for example: -

i. When you're planning projects, to help you to anticipate and neutralize possible
problems.
ii. When you're deciding whether or not to move forward with a project.
iii. When you're improving safety and managing potential risks in the workplace.
iv. When you're preparing for events such as equipment or technology failure, theft, staff
sickness, or natural disasters.
v. When you're planning for changes in your environment, such as new competitors coming
into the market, or changes to government policy.
How to Use Risk Analysis
To carry out a risk analysis, follow these steps:
1. Identify risks
The first step to managing business risks is to identify what situations pose a risk to your
finances. Consider the damage a risk could have on your business. Then, think about your goals
and the rewards that could come out of taking the risk. Depending on your business, location,
and industry, risks will vary. These can come from many different sources. For instance, they
could be:
 Human – Illness, death, injury, or other loss of a key individual.
 Operational – Disruption to supplies and operations, loss of access to essential assets, or
failures in distribution.
 Reputational – Loss of customer or employee confidence, or damage to market
reputation.
 Procedural – Failures of accountability, internal systems, or controls, or from fraud.
 Project – Going over budget, taking too long on key tasks, or experiencing issues with
product or service quality.
 Financial – Business failure, stock market fluctuations, interest rate changes, or non-
availability of funding.
 Technical – Advances in technology, or from technical failure.
 Natural – Weather, natural disasters, or disease.
 Political – Changes in tax, public opinion, government policy, or foreign influence.
Structural – Dangerous chemicals, poor lighting, falling boxes, or any situation where staff,
products, or technology can be harmed.

2: Document risks
Once you have a list of potential business risks, define them in a document. Develop a process to
weigh the effect of each risk. Look at how much damage the risk could potentially cause and
how hard it would be to recover. Set up a scoring system for risks, from mild to severe.
3: Appoint monitors
Identify individuals at your business who will keep an eye on and manage risks. The risk monitor
might be you, a partner, or an employee. Decide how risks should be reported and handled.
When you have procedures for risk management, issues can be taken care of smoothly.
4: Determine controls
After understanding potential risks, figure out controls you can use to reduce them. Look at
patterns over time to predict your income cycle. And, assess the impact risks have on your
business. Look at the significance of a risk as well as its likelihood of occurring at your business.
5: Review periodically
Your business risk assessment is not a one-time commitment. Review risk management
processes annually to see how you handle risks. Also, look out for new risks that might not have
been relevant in the previous assessment.

Risk Management
This is a process in which businesses identify, assess and treat risks that could potentially affect
their business operations.

Importance of risk management

 Save money and protect the future of a business.
 Creates a safe and secure work environment for all staff and customers.
  Increases the stability of business operations while also decreasing legal liability.
 Provides protection from events that are detrimental to both the company and the
environment.
 Protects all involved people and assets from potential harm.
 Helps establish the organization's insurance needs in order to save on unnecessary
premiums.

Risk management approaches

After the company's specific risks are identified and the risk management process has been
implemented, there are several different strategies companies can take in regard to different types
of risk:
Risk avoidance. While the complete elimination of all risk is rarely possible, a risk avoidance
strategy is designed to deflect as many threats as possible in order to avoid the costly and
disruptive consequences of a damaging event.
Risk reduction. Companies are sometimes able to reduce the amount of damage certain risks
can have on company processes. This is achieved by adjusting certain aspects of an overall
project plan or company process, or by reducing its scope.
Risk sharing. Sometimes, the consequences of a risk are shared, or distributed among several of
the project's participants or business departments. The risk could also be shared with a third
party, such as a vendor or business partner.
Risk retaining. Sometimes, companies decide a risk is worth it from a business standpoint, and
decide to keep the risk and deal with any potential fallout. Companies will often retain a certain
level of risk if a project's anticipated profit is greater than the costs of its potential risk.

Limitations or Risk Management

While risk management can be an extremely beneficial practice for organizations, its limitations
should also be considered.
i. Expensive and is not guaranteed to be reliable. Many risk analysis techniques -- such
as creating a model or simulation -- require gathering large amounts of data. This
extensive data collection can be expensive. The use of data in decision making processes
may have poor outcomes if simple indicators are used to reflect the much more complex
realities of the situation. Similarly, adopting a decision throughout the whole project that
was intended for one small aspect can lead to unexpected results.
ii. Lack of analysis expertise and time. Computer software programs have been developed
to simulate events that might have a negative impact on the company. While cost
effective, these complex programs require trained personnel with comprehensive skills
and knowledge in order to accurately understand the generated results. Analyzing
historical data to identify risks also requires highly trained personnel. These individuals
may not always be assigned to the project. Even if they are, there frequently is not
enough time to gather all their findings, thus resulting in conflicts.
iii. A false sense of stability. Value-at-risk measures focus on the past instead of the future.
Therefore, the longer things go smoothly, the better the situation looks. Unfortunately,
this makes a downturn more likely.
 iv. The illusion of control. Risk models can give organizations the false belief that they can
quantify and regulate every potential risk. This may cause an organization to neglect the
possibility of novel or unexpected risks. Furthermore, there is no historical data for new
products, so there's no experience to base models on.
v. Failure to see the big picture. It's difficult to see and understand the complete picture of
cumulative risk.
vi. Risk management is immature. An organization's risk management policies are
underdeveloped and lack the history to make accurate evaluations

Risk management standards

Since the early 2000s, several industry and government bodies have expanded regulatory
compliance rules that scrutinize companies' risk management plans, policies and procedures. In
an increasing number of industries, boards of directors are required to review and report on the
adequacy of enterprise risk management processes. As a result, risk analysis, internal audits and
other means of risk assessment have become major components of business strategy.
Risk management standards have been developed by several organizations, including the
National Institute of Standards and Technology (NIST) and the International Organization for
Standardization (ISO). These standards are designed to help organizations identify specific
threats, assess unique vulnerabilities to determine their risk, identify ways to reduce these risks
and then implement risk reduction efforts according to organizational strategy.
The ISO recommends the following target areas, or principles, should be part of the overall risk
management process:
 The process should create value for the organization.
 It should be an integral part of the overall organizational process.
 It should factor into the company's overall decision-making process.
 It must explicitly address any uncertainty.
 It should be systematic and structured.
 It should be based on the best available information.
 It should be tailored to the project.
 It must take into account human factors, including potential errors.
 It should be transparent and all-inclusive.
 It should be adaptable to change.
 It should be continuously monitored and improved upon.