Managing risk in business

IN DECEMBER,I had a lightning bolt visitation which left all the electronic equipment which was plugged to the walls damaged despite being switched off. Another of the casualties was my underground Telkom DSL and in typical Telkom fashion, more than four weeks later the external line is still not fixed. This occurrence made me think a little more about the issue of risk, particularly after I had complained loudly about my increasing premiums to my insurance company. Back in the nineties in our home country Zimbabwe, before our own socio-economic environment became the highest risk factor in our lives, NICOZ ran a series of poignant and dramatic insurance advertisements which always ended with the slogan: You never know what is going to happen. It captured my attention back then. Risk is defined as the degree of certainty or uncertainty as to the realisation of expected future financial returns in a business venture. Recent events in the world have provided dramatic evidence that in todays business world, risk is a reality. In general, risk is inherent in all areas of endeavor. You cannot run away from it. Taking calculated risks is part of any business venture. Each business needs to have in place a system and management processes necessary not only to identify the risks associated with the business activities but also to effectively measure, monitor and control them. Identifying and being able to openly discuss the risks inherent in your business increases your credibility with investors and strategic partners. Uncertainty means that decision makers do not have sufficient information about environmental factors, which increases the risk of failure. Risk taking is essential to profit-making. Not all risks and challenges can be anticipated but once identified, risk can be managed. The essence of risk management lies in maximising those areas where we have some control over the outcome while minimising those areas where we have absolutely no control. The controllable elements that are in our scope are cash outlay, activities of the business itself, personnel, finance and production. The uncontrollable forces are external forces over which your business has no direct control, for example, interest rate, fuel, and commodity price increases, drought and floods. According to Wikipedia, risk assessment consists of an objective evaluation of risk in which assumptions and uncertainties are clearly considered and presented. Part of the difficulty of risk management is that measurement of both of the quantities in which risk assessment is concerned - potential loss and probability of occurrence - can be very difficult to measure. The chance of error in the measurement of these two concepts is large. It's not possible to avoid every risk altogether. You can get a better handle on risk by making sure you're aware of the different types and levels of risks. Inherent in financial risk is the chance of losing your money. Some common types of risk are: market risk which is the chance that the entire market will fall; industry risk which can result in the decline of a given industry; concentration risk which results from having too much exposure to a sector and valuation risk which arises from an overpriced security falling in price. A general risk is that your investments will not keep pace with inflation or grow enough to meet your long-term financial goals.

The Zimbabwean investment landscape has previously been biased towards property and physical assets such residential properties, cars, grinding mills, and livestock because of hyperinflation which has rendered returns on the markets negative in real terms. However, this kind of investment may not be suitable for working capital management as these assets are not so liquid, that is they take time to dispose of as and when funds are needed for use in the business. There are various financial sites with questionnaires that can help you calculate and determine your financial risk and you will be able to see your risk profile immediately afterwards relative to a standard scale. It is good to be individually armed with this knowledge. Your investment risk profile should determine what types of investments, or asset classes, you invest in. Risk profile assessment is usually determined using a series of check questions. These helps us have an idea how we feel about investment risk and how much downside market fluctuations we can tolerate. The key reason for classifying people into a defined investment risk profile category is because most investment planners use asset allocation models that correspond directly with each category. These may range from defensive investors with an investment risk profile that does not tolerate significant market turmoil and is willing to forego significant upside potential, just to achieve capital protection. At the other end of the continuum are aggressive investors who want to substantially outperform the markets and are exposed to much more risk than most of us and can potentially make much of the profits. Investment projects are conventionally appraised financially by comparing the projected indicators Net Present Value (NPV) and Internal Rate of Return (IRR). These indicators are dynamic in the sense that they measure the effects of interrelated transactions in different periods of time. The major differences between the NPV and IRR indicators are that NPV determines a unique value in monetary terms, while IRR seeks a rate of return. IRR applies the same rate to all cases whereas in the NPV method, different rates can be applied based upon the disposition of portions of the different purposes. As we plunge into various ventures in 2011, a proper assessment can really pinpoint exactly where you are going wrong in your entrepreneurial endeavours, both from a business point of view and from a personal point of view. A holistic assessment on both you and your business will immediately give you an indication of where your personal and business entrepreneurial challenges lie. Key risks to consider: Economic risk - How is the business world today? What is the window of opportunity for this venture? Includes political threats, economic cycles, interest rates, governmental regulations. People risk - Is the business owner going in business alone or joining with others? Commitment and priorities, holidays, friends, family have to come second. Market risk - What are the dynamics of this industry sector? Is there going to be room for growth in this market? What about the risk of other competitors? Technical risk - Does the product work? What about some technology coming along in the future that will make this product worthless?

Strategic risk- Is there a sustainable competitive advantage? Includes sharing the risk with strategic alliances and finding the right operations strategy with a viable business model. Financial risk - Can this business or activity get funded now? What about later rounds of financing? In conclusion, in order to manage risk effectively, you need to develop an effective strategy. You need to remain thoroughly balanced and yet focused on risk and reward. Investors minimise their risk by having an in-built margin of safety in their investments, so should you and me.