BUSINESS RISK Shakilah Nagujja

MANAGEMENT
COURSE CONTENT
Business risk management
Definition of risk
Types of risks
Forms of risk
Risk management
Risk drivers
Risk analysis
Risk responses
Benefits of risk management
Reasons for poor risk management in Uganda
DEFINITION OF KEY TERMS
Risk management. Refers to the systematic application of procedures to the tasks of
identifying, assessing and controlling of risks, through implementation of planned risk
responses. For risk management to be effective, risk needs to be identified, assessed and
controlled for as long as the business is going concern.
Business risk management is a subset of risk management that focuses on risks to business
operations, systems, and processes. Identifying, prioritizing, and addressing risks will help you
to minimize unforeseen incidents and penalties and keep your business on course.
Risk, Refers to the probability that an event will occur, risk can also be understood as an
uncertain event or set of events that should it occur, will have an effect on the achievement of
business objectives. It consists of a combination of the probability of a perceived threat or
opportunity occurring and the magnitude of its impact on the objectives of a business.
Threat, this refers to an uncertain event that could have a negative impact on the objectives
of a business.
Opportunity, refers to an uncertain event that could have a favorable impact on objectives of
a business.
TYPES OF RISKS
There are two types of risks;
Systematic risks:
These are called external risks
These influences a large number of assets Sometimes called
market risk
They affect nearly every business.ie interest rates, inflation,
environment regulation etc
They are not in direct control of management
TYPES OF RISKS
Unsystematic risk
This risk affects a small number of assets
Some times called unique or specific risk.
Such as Staff strike, location factors , unavailability of raw material
,poor service delivery, poor controls etc.
They are within direct control of management
FORMS OF RISK
Financial risk
These are risks which may result into financial loss or gain. Most businesses take risks
with their financial assets on a regular basis. Choosing the wrong supplier or
distributor can backfire when the supplies needed to make a product don’t arrive on
time or the distributor goes out of business, stranding the products with no way to
move them. Relationships with clients also can be risky, especially if a company comes
to rely on one too much.
Employee risks
While these may include physical risks, business risk management should also take
into account how to prevent theft, fraud, and other crimes by employees. Another risk
to a business caused by employees is simple human error, where even a tiny mistake
in entering data or in the manufacturing process can have huge and sometimes
devastating consequences. Risk management should include a quality control process
for data input and production to minimize the impact of employee errors.
PROCESS OF RISK
MANAGEMENT
Identify the risks involved in all aspects of the business.
Review the probability of the negative events occurring.
Come up with a plan, a way to decrease the risk.
Put the plan into action.
Monitor the situation to see if the plan is effective or if it needs to
be altered
RISK DRIVERS/RISK
IDENTIFICATION
The first step, of course, is to identify what kind of risks your business is
exposed to. But where do you look for them? Both internal and external
factors drive risk. You probably know some of them already.
External drivers
 Strategic risks: Competition, Customer needs & demands, Industry changes
 Operational risks: Government regulations, Political environment, Culture, Vendors/suppliers,
contracts
 Financial risks: Interest rates, Foreign exchange, Credit
 Hazard risks: Natural disasters

Internal drivers
 Strategic risks: R&D, Intellectual capital
 Operational risks: HR, Systems & processes
 Financial risks: Cash flow, liquidity
 Hazard risk: Safety (Employee and Equipment), Security
RISK ANALYSIS
Risk evaluation and analysis helps you determine the significance of each risk. It also enables you to
decide whether to accept, mitigate or take action to prevent it. There are a number of tools you can
employ to analyze risks:
Market surveys
Research & Development
SWOT - Analysis of Strengths, Weakness, Opportunities, Threats
PEST - Political, Economic, Social and Technology analysis
Scenario Analysis
Auditing and Inspection
Industry benchmarking
Business process analysis
Risk map
Brainstorming
Once the risks have been identified, I usually rank them based on their probability of occurrence and their
impact. Check back with your business plan how the identified risks can impact your business. Use it to
put in systems and controls in place to deal with the consequences of the identified risks - even the good
ones.
RISK RESPONSES /
DEALING WITH RISK
Transfer – this is where a third party takes on responsibility for some/whole of the
financial impact of the threat. Such as insurance is one of the well known methods
to transfer risk.
Accept - There is nothing much you can do about certain risks (threat). It is just
beyond your control. Or the cost of eliminating a particular risk is too high to the
extent it’s more economical not to attempt a threat response action.
Avoid
This is where some of the objectives of the business are changed so that the threat
either can no longer have an impact or can longer happen.
Fallback
Refers to putting in place a fallback plan for the actions that will be taken to reduce
the impact of the threat should the risk occur. This is a reactive form of the reduce
response which has no impact on likelihood.
RISK RESPONSES /
DEALING WITH RISK
Share this is a threat or opportunity response technique which entails a form of risk sharing
through the application of a pain or gain formula i.e. both parties share the gain (within pre-
agreed limits) if the cost is less than the cost plan; and share the pain (within pre-agreed
limits) if the cost plan is exceeded.
Exploit
This is seizing an opportunity to ensure that the opportunity will happen and that the impact
will be realized.
Reject
This is a conscious and deliberate decision taken not to exploit or enhance the opportunity,
having determined that it is more economical not to attempt an opportunity response action.
Reduce - You may be able to introduce systems and processes to reduce certain risks. The
negative impact of the risk is reduced.
Enhance; this is a proactive decision/response undertaken to boost/improve the probability
of the event occurring and impact of the event should it occur.
Threat responses Opportunity responses

Avoid Exploit

Reduce (probability and/or impact) Enhance

Fallback (reduces impact only)  

Transfer (reduces impact only)

Share share

Accept Reject
IMPORTANCE OF BUSINESS
RISK MANAGEMENT
It builds business confidence among entrepreneurs, Such as on goods in transit both on transport, freight and
shipping.
It helps the business prevent a disaster that would result from having too severe impact on finances and other
assets of the firm.
It cultivates faithfulness between and among traders since they are bond together by the risk management.
It provides employment as a separate industry to professionals such as accountants, lawyers, underwriters
etc.
It ensures proper planning and documentation of different assets and their likely risks.
It facilitates trade especially international trade in that almost as goods have to be insured before transit.
It cultivates professionalism in business by guarding against any risk.
It covers/protects the business against risk depending on the risk responses undertaken by the entrepreneur.
It enhances business continuity by insuring it against third parties through risk transfers.
It helps in setting of priorities by re-organizing the allocation of organizational scarce resources and capital by
helping to regularize the way that priorities are set. This helps in decision-making and planning.
REASONS FOR POOR RISK
MANAGEMENT BY UGANDAN
ENTREPRENEURS
Ignorance of some entrepreneurs about the importance of risk
Limited finances in some organizations
Poor government policy towards enforcement of insurance
Lack of enforcement policy, and procedures such as unenforced insurance policy
Negligence of many business practioners
Traditionalism such as norms, values and cultures. Many Ugandans still believe in
traditional means of managing risk in business
Limited number of insurance firms operating in Uganda
Excessive compensation procedures which demotivates entrepreneurs from
insuring their assets.
General negative perception from the public about risk management procedures.