Management of Risk in Business - Coursework Example

WORK, BUSINESS Introduction This paper delves in the management of crisis as well as risk. In this discussion, the paper will focus on the theories and risk models. It is important to highlight that risk modeling basically involves the putting into effect the various mechanisms and criteria so that the firm or an organization can be in a position to determine the monetary value of the financial loss that the organization is likely to expect. It is quite important to conduct this kind of exercise in every institution so that the managers can know the amount of financial reserve to put in place for the emergency purposes. It is also for the effective and appropriate purchases and sales of the required financial assets. There are quite a number of techniques that are put into place for the modeling. Some of the measurers are the marketing risk, the historical simulation, the value at risk as well as extreme value theory. It is also important to highlight that a business should be guided appropriately with certain principles as well as theories for the successful operation of the business (Jacques, 2007). Just as the saying goes, for one to be successful; and rich, one must be ready to venture into a risky business. It is therefore of the fact that one bears all these risks in the action. It is important to highlight that risks are in segmented into different categories. These are credit risk, liquidity risks, Market risk as well as the operational risks (Jacques, 2011). Credit risks These are risks that are anticipated in a financial institution or any business entity based on the credit transactions that occur or might have occurred during the moment of truth. It is important to highlight that for a credit transaction, it is important to consider the credit worthiness of the buyer, the financial status or position of the buyer, the frequency of the buyer purchasing firm the business entity, the credit worthiness of the buyer as well as the amount of stock that is available in the business entity. This helps the business people in evading certain risks after they become well equipped with the consumer knowledge. Under this category of risk, the following are the risks that form up this group: Consumer credit risk These are risks that are associated with the consumer either making a purchase or consuming the product or service or the consumer accessing some form of financial assistance. These in many cases are experienced in cases that the consumer thereby defaults in making payments. This thereby results into bad debts that would therefore force the financial managers or the managers of the given institution in question to dig deep into their pockets to compensate for the loss that they have so incurred. In other words it can be said that these are risks that occur as a result of bad debts. A good example is a case where a consumer takes commodities on credit and fails to pay for the items completely. This is therefore upon the entity to get funds to pay for the loss (Jon, 2011). Securitization risk Security is collateral that can be withheld by a given financial institution or any business entity that is offering any form of financial assistance. Security could be in the form of assets ranging from the current to the noncurrent assets. The risk in this case does come in when the security is not valid and the documents that are presented are not legalized. It is important to note that before any financial assistance is given to a client, there is always the valuation of collateral that can be taken back for compensation of the money that is lent in the event of default in payment. For example one can give a title deed for a given piece of land as a security for a given financial aid. The title deed here is a security as the piece of land can be so in this case to pay if the owner of the land fails to pay back the given loan (Stefan, 2009). Advantages of credit risks Helps in increasing the volume of sales. Improves the business image and reputation. Boosts customers’ loyalty and trust in the business. Criticisms of the credit risks The risks if put into much consideration can make investors not venture into business because if the fear that they would realize heavy losses in the business transactions. It is also highly criticized in the sense that it can lower sales volume especially in the situation that other business use credit sales as a method of conducting sales while one firm fears credit transactions (Stefan, 2009). Market risk versus Market theory These are risks that do arise at the time of the interaction with the customer or the clients. It is also important to highlight that these risks are also as a result of the economic situations in the country and so that affects the business market. In this discussion therefore, the factors or the risks that will be put into consideration revolves around the contemporary market situation and economics (Jacques, 2007). Under the market theory, it is related to the market risk in the sense that the investor must conduct some kind of market research to know the market status. The theory requires them to identify the rates of exchange in the market, inflationary rates and the price fluctuation in the world market (Stefan, 2009). Currency risk In the business market today, there are emerging issues that are anticipated by the various entrepreneurs as well as the investors. This is so as they are mostly affected in the long run. Currency risks are explicitly as a result of the rates of the foreign exchange in the various countries. This affects the prices, the values as well as the costs of the various items in the country. The price fluctuation in the world market is therefore a very crucial factor that needs to be put into consideration by the various business practitioners. The rate at which the currency of a given country exchanges against the currency of another country is therefore an important aspect that should be considered. It is important to reiterate the fact that this fluctuation could be as result of the rapid changes in the inflationary rates in the world market (Jon 2011). It is so true to say that these risks are always anticipated by the various entrepreneurs in their respective countries and so they make adjustments accordingly in their budgets for them to meet the expenses and also not to run at a loss. A good example is the foreign exchange rates. Take a case where a business bought goods from a country that has a weaker money value. The business now wants to sell the items in their home country. It means there will be a loss that will be realized because of the difference in the strength of the currencies (Jacques 2007). Interest rate risk Every financial as well as the business firms aims at the realization of certain amount of money as their profit. Similarly, the financial institutions that provide financial assistance to the people charge certain amount of interest for them. This is a risk that most investors undertake. The charges that are levied by these institutions is therefore a risk that they assume in making this kind of decision. A good example for this is the case where a company plans to take a business loan from a given financial institution that charges certain interest rate. The rate may not be that favorable to the company but because this institution could be the lender of last resort in this case, the company would therefore bear the risk and go for the loan (Alfred, 2008). Advantages of marketing risks Helps in the determination of the prices thereby favoring price discrimination. Help in planning for all the expected expenses in the market during the selling of the goods. Criticisms of market risks The risk is highly criticized at some point especially in the sense that it can be quite tiresome and expensive if one is to ascertain the required market aspect. Commodity risk and volatility risk versus product theory This is a risk that is mostly experienced in the market by the business people. Under this, it is important to highlight that the business persons take this risk in the sense that they losses that they may undergo as a result of the perishable commodities going bad, breaking and damages that the commodities have undergone as well as the commodities that have not been bought are on the workload of the owners. They therefore bear all these risks that are related to the commodity characteristics and market behavior. For example, a business that deals with the selling of perishable commodities, fragile and volatile goods. In case of an accident or failure to purchase these perishable goods, the business will run at a loss thereby what was meant to be sold is therefore disposed off. This is at the expense of the business (Steven, 2012). This is similar to the product theory. Under this theory, the producer is required to know all the product features and that the producer should be able to produce what meets the market demand and that what is produced is fully purchased and consumed by the users of the product to evade losses (Jacques 2007). Equity risk Equity or capital is the owner’s claim or worth in a business. The risk is mainly realized by the business owners when there is a financial loss that is experienced in the business. The risk is also in the case where the owner needs to expand the business or to meet the management business requirements but the available funds in the business account are insufficient or inadequate. The owner would therefore be forced to go an extra mile and solicit funds for the business operations to be as they are planned and organized (Jacques, 2007). This is therefore a bold move and risk that the business owners take to manage and continuously run the businesses. They so bear all the risk in the case where they are forced to solicit funds from other external sources (Jacques, 2011). Operational risk versus marketing theory The theory requires that the sales persons who exchange the items or sell to the customers interact with them in the right way that would stimulate them in making purchases from the institution. This is as it is in the operational risk as they all occur during the moment of truth when the customer and the seller interact. This knowledge is therefore quite important for the developing of the better strategies of marketing and selling for the success of the business enterprise (Evgueni, 2008). These are risks that are also experienced during the time that the business people and the business institutions interact with the customers. It is important to highlight that these risks are quite sensitive as the activity that occur at this particular point in time is quite determinant for the success or the excellence of the business or the given financial institution. The following risks therefore are falling under this category: Legal risk These are risks that are associated with the legal framework of the country that the business operates under. It is important to highlight that every business entity is required to operate and to comply with the regulations that the states have put forth for the healthy business operations to be seen in the country. It therefore calls for the businesses to apply for the trading and operation licenses so that they operate legally in the country’s market. A good example is a business that assumes that there is no government intervention in the market and then the business operates without complying as the laws and regulations require. Under this, the business takes a great risk and should therefore be sued (Alfred, 2008). Political risk This is a risk that is usually associated with the political climate of a country. It is important to highlight that the political set up of a country therefore has much influence in the operations of a business. This is so for example the cases of political instability in most of the Middle East countries, there are few business entrepreneurs that are willing to set up and establish businesses in such states due to the poor political climate in such states (Evgueni, 2008). It is also important to highlight that there are certain entrepreneurs who bear the risk and venture into businesses in such areas bearing in mind the security state of such countries. The only factor that they have in mind is the high level of optimism that they have, peace and harmony would be restored. Security is a major factor that is considered to be quite sensitive in the business environment. A country that is relatively stable stimulates high entrepreneurial activities and culture in the country thereby developing the country further (Steven, 2012). Advantages of operating risks Helps in ensuring healthy business competition in the market especially through licensing. Helps in the identification of the most ideal place of locating the business to meet the target. Criticisms of the operating risks Can create delays as the process is quite long and cumbersome say when acquiring the operating permit. Operational risk management versus the selling theory These are risks that are caused by the human work force in the business institution. It is important to note that for the success of a business institution, it is important or the management and the employees in the business to have a good relationship. Good relationship that is both vertical as well as the horizontal relationship is quite important for the effective management and also for the loyalty of the employees towards the firm to be boosted (Daykin, 1993). This is similar to the operational risk management risk, under this the target is that the products that are supplied in the market are wholly sold and that there is no losses that arise as a result of no sales. This therefore calls for the sellers to be very vibrant and good in communicational skills as well as marketing skills for the sales to be as desired (Alfred, 2008). It is very advisable to boost the loyalty of the employees to realize better productivity of the employees and also to improve the sales volume in the firm. A good example is the case that happens whereby an employee is sent by the business to do sales on behalf of the business. In the end the employee disappears with all the sales that are made. This is due to the dishonesty of the employee. It can also be in a case that there is marketing of a product and the employee gives wrong information concerning the business (Jacques, 2011). It is also important to note that certain risks might occur in the areas that the business operates that require the attention of the business owners. Some of these contingencies include the risks that are caused as a result of fire outbreak, thus burning all the assets that belong to the business. Others could be as a result of theft and other forms of robbery, risks resulting from accidents during operation and delays. All these are risks that affect the operational area of an entity (Evgueni, 2008). Reputational risk Reputation is the business image or picture. How the public view the business. It is important to note that for the success of any business organization, it is quite idea to develop a good reputation from the public. Just as it is said that the customer is the king, it is therefore important to make them view your business as the one that gives the best. A good reputation of an organization can be developed in several ways. This can be by providing high quality products and of right quantity, giving the actual information and laying a strong way of relating with the customers well. It is therefore assumed as one of the risks that the business enterprises bear with the view and an assumption that they are having a good reputation and remarks from the public in general. A very good example is the case that a business is known to be selling high quality products and that the services that are provided say for the case of a business that provides services. It true to note that for such kinds of business enterprises, the customers will view them to possess the right business code of conduct or rather ethics. Reputation is therefore a vital risk that businesses assume in their operations (Alfred, 2008). Advantages Increases sales volume especially when the business has a good reputation. Boosts loyalty towards the firm. Criticisms of the operating risk management Highly sensitive and if messed, the business reputation is stirred to the adversely and so the sales decreases. Liquidity risk It is important to highlight that before the business managers or the entrepreneurs take a given initiative, it is important for them to consider the various liquidation states and scenarios (David, 2008). Refinancing risk This is a risk that the business managers as well as other financial institution managers pu into consideration during the time in which they undertake the apathy of soliciting funds from external sources. The business should be in a position to be able to pay back the debts that were accrued to the business from other sources without it becoming bankrupt. A good scenario for this occurs when a company is being liquidated (David, 2009). Conclusion In conclusion, it can be noted that before the investors engage themselves in any form of investment activity, there are several factors that they put into consideration to enable them match the market force and state. This is through being cautious concerning the risks and enforcing theories into use for the better market operations. References Alfred, L. (2008) Causal Risk Models of Air Transport: Comparison of User Needs and Model, IOS Press, page 74. David, L. (2009) Credit Risk Modeling: Theory and Applications, Princeton University Press, page 62. David, M. (2008) Understanding Risk: Theory and Practice of Financial Risk Management, Wiley and Sons, page 53. Daykin, D. (1993) Practical Risk Theory for Actuaries, CRC Press, page 31. Evgueni, D. (2008) Scenario Logic and Probabilistic Management of Risk in Business and Engineering, Springer publishers, page 42. Jacques, J. (2007) Semi-Markov Risk Models for Finance, Insurance and Reliability, Springer publishers, page 134. Jacques, J. (2007) Semi-Markov Risk Models for Finance, Insurance and Reliability, Oxford University Press, page 321. Jon, D. (2011) Financing Risk Forecasting: The Theory and Practice of Forecasting Market, Routledge, page 232. Stefan, T. (2009) Rating Based Modeling of Credit Risk: Theory and Application of Migration, Steven, P. (2012) Investment Theory and Risk Management, Wiley and Sons, page 43. Read More