Chapter 2
Why Manage Risk?
In this chapter
 Promoting company strengths
and profits
 Understanding why businesses
fail
 Growing the upside and
protecting the downside
If risk is as much a part of daily
business life as, say, breathing,
then why manage it? The quick
answer by managing risk we can
either avoid the events that lead
to loss or reduce the amount of
loss when those events occur.
Owners can bring principles and
systematic processes into their
businesses that help them make
the decisions necessary to
ensure the best possible outcome
no matter the situation. These
risk management processes also
help owners make critical
decisions in day to day operation.
What kills Companies?
Bookshelves from here to the
nearest business school are filled
with well-crafted books on how to
succeed in business. But despite
the combined knowledge of
centuries of business, 33% of all
business start-ups fail within two
years and 56% fail within 4 years.
Why do businesses fail? There
are 7 primary reasons:
 Financial Failure. There are
several types of financial failure
but for most businesses, it
usually amounts to the inability to
manage cash flow. This may be
due to a variety of issues
straining your cash a specific
obligation that can’t be covered
or simply poor accounting or
fiscal management practices.
 Strategic inability to compete.
Competitors with better product
and greater ability to reach the
customer often force out longer-
standing less aggressive
companies
 Merger or takeover. Competitors
often swallow up companies by
buying the business or top
product lines or merging the
company into their own.
 Force majeure. This is the God
Forbid reason many businesses
fail because of natural disaster
such as tornadoes, hurricanes,
floods, and fire, in some countries
war is also a major business risk
 Fraud. Roughly one third of
businesses that fail do so
because of fraud embezzlement
by employees cooking the books
to suit auditors and shareholders,
and other misuses of money.
  Loss of key supplier.
Businesses that lose key supplier
risk losing quality control and
customer satisfaction.
 Loss of key Customer.
Businesses that rely on a few
large customers for most of their
income face major risk of failure if
a customer or key channel for
acquiring customers, moves on.
Protect that Downside!
The promotional side of business
focuses on the upside that lofty place
where your dreams, projection, revenue
indicators, and future business plans
meet with a receptive marketplace, It is
easy to feed energy into the upside to
keep investing and planning for a
successful future.
Fewer Fires to Fight
Something comes up an emergency fill
in order a sudden visit from a quality
control inspector, an unplanned
machine maintenance an unanticipated
drop in crucial inventory these situations
are fires that require everyone’s
immediate attention and resources.
They create strain within your company
and with suppliers and paralyze the flow
of your business
Fewer Management Surprises
Nothing quite sucks the wind out of a
satisfied manager or owner’s sails faster
than discovering a major operation
problem, a cash flow problem or worst
yet a pure loss of money surprise
unfortunately these type of surprise not
only ruin decision makers days but are
often caused by major systematic
breakdowns that can set a business
back days, weeks, or Months.
Reduced Earnings Volatility
Investors might not own businesses
outright, but they have the right idea
when it comes to profit flows they seek
stability and predictability. They steer
away from the sharp ups and down of
high earning volatility.
 Earnings Volatility
Is the ebb and flow of a
business’s earnings over week,
quarters, or years high earnings
volatility can put your business at
risk in a number of ways. Low
earnings volatility suggests
stability and long-term strength.
Reduces Budget Blowouts
Budget blowouts are particularly
troublesome because they seize
up entire departments or
operation. Risk management
helps companies understand
where weaknesses lurk enabling
them to take steps to prevent
them.
Protection of Assets
 Business assets consist of key
physical items that drive any
business forward. The three most
critical asset categories are as
follows:
 Financial
 Equipment
 Personnel
When any of these assets falter,
the business falters.
Consequently, business owners
must protect the downside of all
three assets and they must do so
in two ways: as they pertain to
the bottom line and as a matter of
safety.
More Efficient Issues
Resolution
When something happen to your
business, good risk management
speeds up the process of finding
efficient and specific approach for
identifying and resolving key
issues.it also provides the means
of evaluating the best options for
mitigating the situation. When
something happens, it is vital to
find the best solution quickly and
to implement it without delay
Grow the Upside
No one enters business to focus
on the downside, winning new
project, landing new customers,
expanding skills and operation,
hitting profit and revenue
projections, and building an even
greater upside.
Improve Competitiveness
One of risk management’s
greatest unsung benefits is the
increased competitive edge it
gives businesses. With risks
identified, and either avoided or
mitigated, companies can focus
more resources, time and
decision-making manpower on
identifying and assessing
opportunities in the marketplace.
The business can be more
responsive to request for
proposals or the opening new
accounts. With added time and
the security of knowing risks have
been handled, owners and
salespeople can focus on the
better understanding how to
respond to specific opportunities.
This enables the business to
grow and thrive.
Improved Returns Relative to
Risk
By being able to assess risk more
formally on the upside, as well as
the downside, companies can
better understand where and how
they are achieving returns. They
can accurately project how much
return is needed to support the
risk they are taking as part of a
business growth operation.
Potentially it is far better to spend
money mitigating the effect of a
known risk than paying to clean
up the damage of a unknown risk
after it hits.
Improved Efficiencies and
Quality
When risk is factored into
business planning and operation,
the business tends to becomes
more efficient and provide higher-
quality products and services.
 Resources, time, and better
process monitoring techniques
can be applied to making better
products or improving
Improved Communication
One of the greatest upside of risk
management is its ability to
increase quality communication
in the workplace. Company-wide
knowledge of the business’s risk
management strategy generates
company0wide communication.
This communication helps
everyone understand the issues
in the same way and enhances
further insight through informed
problem-solving
Increased Employee
Confidence
When risk is being managed at a
company, and he the rank and
file know it employees feel a
greater sense of security. When
workers know that the company
leadership is looking out for
pitfalls, their confidence in the
company and their jobs within the
company grows. Employees may
also feel empowered to improve
their skills for managing risk
issues that come up in their own
departments and to learn more
about how management is
dealing with issues. This
increases their confidence even
more creating a stronger and
more dedicated workforce.
Reduced Fines and
Compliance Costs
Schedules, reviews, filling, and
other key dates often get lost in
the hustle and bustle or daily
business. A risk management
plan will turn these into priority
items, resulting in fewer missed
deadlines and overlooked
requirements, thereby minimizing
the risk or being fined, failing to
apply for appropriate licenses
and so on.
Reduced Consequences
It is crucial to reduce the
consequences of failed financial
obligations. If a company misses
just one critical financial
obligation, the door can literally
close next month or tomorrow. If
you don’t make payroll or delay
payment for example, employees
may walk. If you don’t take a
credit payment, bank may call the
loan. A bond call can shut down a
company within a couple of
weeks that’s what happened to
Enron. A market call has the
same impact, since all trading
with the company will be
suspended. When you can’t pay
a supplier, it won’t be long before
that supplier stops shipping
critical material to you.
 Reduce Litigation
A well-managed business that
knows its current and potential
short and long-term risks and
acts upon them is less likely to sit
on either side of the litigation
fence. Disputes between the
company and suppliers,
customers, regulators and other
authorities will be reduces and
when dispute do arise you’ll have
clear well organized
documentation to back up your
company’s claim the expensive
reputation-threatening decision to
litigate can be replaced by
mitigating the situation.
Reduced Insurance Costs
With fewer and smaller incidents
comes a perceived increase in
company safety and reliability by
the insurance industry,
consequently managing risk well
often leads directly to lower
insurance costs
Reduce Business Interruptions
Risky situations almost always
slow down company processes.
They can mean interrupting a
sales manager for three critical
selling hours or shutting down an
assembly line because a
financially strapped supplier sent
watered-down materials to
stretch their inventory. The key to
risk management is to build just
enough measures and systems
into place so that ideally noting
will shut down or be interrupted.
Every time an incident occurs
that takes an employee or
employees away from their jobs,
causes a delay in production. Or
makes it impossible to supply a
new product time and the
opportunity to sell are lost to the
business. The company loses
money in two ways: from the lost
wages of employees who had to
deal with the situation and from
lost potential sales the less these
incidents occur, and the faster
normal operations.