The Management of Risk by Analyzing Costs and Benefits - Essay Example

? Risk Management The management of risk is done by analyzing the costs and the benefits that the company shall be able to receive in return (Holmes,2002). The management of risk is done on short term and on the long term basis as the cost benefit analysis of both the options are different when the time value of money is considered and in certain cases the risk association with the short term might not be the same as in the long term. Thus the cost and benefit analysis of the risk management is done so as to determine the viability of the project in association with the risk attached with it (Crouhy et al, 2000). For every single operation in the company the company bears a cost. Risk management is one of the major operations in most of the companies. Companies incur a substantial amount of cost in the management of the risks (Ridley & Channing, 1999). Companies hire experts in order to mitigate the risks associated with its operations. The amount of risk to be mitigated varies from company to company and operation to operation. The dependency is related with the intensity of the risk as the risk shall be high when it affects the company’s operation at maximum (Agrawal, 2009). Although the risk is attached with every operation of the company but there are some certain areas in which the concern of the risk is substantial and companies’ need to focus more upon those. The costs associated with risk management is dependent upon both, the intensity of the risk and the value of that risk. The intensity and value tend to differ in every operation and every company. Some companies are more concerned about stock out than other whereas some companies are more concern about the halt in the company’s operations. The management of risk is carried out with utmost focus and importance when an investment is to be made. A decision to choose from many investments is to be made and usually the investment associated with least risk is preferred over others. The basic goal of a company is the maximizing the wealth of its shareholders. A companies manages all risk in such a manner that the company is not derailed from its progress towards its goals. For the pharmaceutical companies the intensity attached with the risk of the new drug is much intense as it has many implications of the respective legislations (Ncbi.nlm.nih.gov, 2013). The high intensity of risk demands high risk management as in the failure of managing the risk shall be leading to the closure of the company. Pharmaceutical companies have more risk intensity than that of other companies as the products of the company is medications and thus greater restrictions and regulations are applied to them (Brown & Mannan, 2004). . Costs in risk management are both qualitative and quantitative as per the objectives of the company. Companies hire expert in management and they evaluate the procedures and the risks involved in it and thus have to incur costs as in terms of salaries of the hired experts. The companies incur cost as direct salaries but the time that is consumed in the process is the cost that the company bear in terms of lateness in the selection criteria as the time value of money is considered to be deteriorating. In short term this cost is of intense importance as the time is short as when the selection is done and the company has to over go with the selected option and carry out the procedures. Whereas in the long run the cost of delaying as because of the time taken in the appraisals and selection is considered important as well where the deteriorating value of money is considered over the time (Jorda?o & Sousa, 2010). Risk management is concerned with the measurement of the risk and the intensity of the risk which is a time consuming method (Krause, 2006). The returns upon the project risk is associated with the market rate of return. The comparison between the two is done in order to appraise the project. There are high probabilities in certain cases where the company sees the project feasible as less risky and afterwards due to the fluctuations in the market the project becomes unfeasible. The market conditions are not persistent and fluctuation are made in the market from time to time. The viability and the intensity of the risk associated with the company and its dependency upon market conditions is a high cost for the companies. In usual risk management techniques the value that is at risk is determined and the risks associated with it is ascertained (Culp and Miller et al., 1998, pp. 26-38). This can be an investment in a security or in a project that the company is opting. The value that is at risk is ascertained and the management of risk is done on this basis regarding long term and short term where the time value of money is considered along with the risk of recovery of the amount and the benefits attached with the options. The risk management technique of determining the value at risk elaborates the financial loss that can be incurred to the company at maximum ad thus incurs cost for the company (Mars & Weir, 2000). The benefits of the risk management for the company include quantitative and qualitative aspects as the company on the one hand saves monetarily and on the other hand it gives the company the achievement of its goals and strengthening company’s worth. When done risk management in the short term the company is able to avoid risks in the short term and can quickly take decisions which are least risky for the company and can lead company towards its goal of getting maximum worth for its shareholders ( Top of Form Das & Das, 2006) Bottom of Form . Whereas in the long term the management of the risk determines that the company make safe investments in the projects and design its operations accordingly so that the return of the company is maximum and the long term impacts are such that the company can implement the minimum risk policies in the future operations of the company (Weinberg, 1998). ReferencesTop of Form Top of Form Top of Form Top of Form Bottom of Form Top of Form Top of Form Top of Form Top of Form Top of Form Top of Form AGRAWAL, R. C. (2009). Risk management. Jaipur, India, ABD Publishers. http://site.ebrary.com/id/10416293. BROWN, M., & MANNAN, S. (2004). Risk management. Rugby, UK, Institution of Chemical Engineers. CROUHY, M., GALAI, D., & MARK, R. (2000). Risk management. New York, McGraw Hill. Culp, C., Miller and Neves. 1998. Value At Risk: Uses And Abuses. Journal of Applied Corporate Finance, 10 (4), pp. 26-38. Available at: http://ideas.repec.org/a/bla/jacrfn/v10y1998i4p26-38.html [Accessed: 18 Nov 2013]. DAS, S., & DAS, S. (2006). Risk management. Singapore, John Wiley & Sons. HOLMES, A. (2002). Risk management. Oxford, U.K., Capstone Pub. JORDA?O, B., & SOUSA, E. (2010). Risk management. New York, Nova Science Publishers. KRAUSE, A. (2006). Risk management. Bradford, England, Emerald Group Pub. MARS, G., & WEIR, D. (2000). Risk management. Aldershot, Hants, England, Ashgate. Ncbi.nlm.nih.gov. 2013. A review of quantitative risk-benefit methodolo... [Value Health. 2010] - PubMed - NCBI. [online] Available at: http://www.ncbi.nlm.nih.gov/pubmed/20412543 [Accessed: 18 Nov 2013]. RIDLEY, J. R., & CHANNING, J. (1999). Risk management. Oxford, Butterworth Heinemann. WEINBERG, A. D. (1998). Risk management in long-term care a quick reference guide. New York, NY, Springer Pub. Co.Bottom of Form Read More