BUSINESS
RISK
What is Business Risk?
Business risk refers to a threat to the
company’s ability to achieve its
financial goals. In business, a risk
means that a company’s or an
organization’s plans may not turn
out as originally planned or that it
may not meet its target.
What is Business Risk?
Such risks cannot always be blamed on
the owner of the company, as risk can be
influenced by various external factors,
which may include rising prices of raw
materials for production, growing
competition, and even changes and
additions to existing regulations set by the
government.
What is Business Risk?
While a company may not be able to
shelter itself from risk completely, there
are ways it can help protect itself from
the effects of business risk, primarily by
adopting a risk management
strategy.
UNDERSTANDING
BUSINESS RISK
Unit 8: Kimberlee Sta. Ana
Understanding
Business Risk
Business risk is associated with the overall
operation of a business entity. These are things
that impair its ability to provide investors and
stakeholders with adequate returns. For
example, a business manager may make certain
decisions that affect its profits or he may not
anticipate certain events in the future, causing
the business to incur losses or fail.
Understanding
Business Risk
Business risk is influenced by a number of
different factors including:
• Consumer preferences, demand, and sales
volumes
• Per-unit price and input costs
• Competition
• The overall economic climate
• Government regulations
Understanding
Business Risk
The company is also exposed
to financial risk, liquidity risk,
systematic risk, exchange-rate risk,
and country-specific risk. These
make it increasingly important to
minimize business risk.
Understanding
Business Risk
A company with a higher amount of business risk
should choose a capital structure with a lower
debt ratio to ensure it can meet its financial
obligations at all times. When revenues drop, the
company may not be able to service its debt,
which may lead to bankruptcy. On the other hand,
when revenues increase, it experiences larger
profits and is able to keep up with its obligations.
Types of Business
Risks
Unit 8: Jhoylyn Pentojo
1. Strategic Risk:
Link:
https://simplicable.
com/new/business-
risk
H O W T O C A L C U L AT E T H E
I M PA C T A N D
PROBABILITY OF
BUSINESS RISK?.
U N I T 8 : K I M B E R L E E S TA . A N A
STRATEGIC RISK SEVERITY
MATRIX:
• Business Risks\Calculation of Risk.pptx
https://laconteconsulting.com/2018/12/02/calculate-
impact-and-probability/
To know more about this, go to the link above.
SCORING:
• A score is determined by the product
(multiplication) of the two numbers. This
number is associated with a 5-level scoring
result (Controlled, Serious, Disruptive, Severe,
or Critical).
SCORING:
• Here are all the possible results:
EXAMPLE:
First:
know whether this is a significant
problem or one that can just be
monitored.
State the problem logically. (how?)
EXAMPLE:
You need to look at the chance of this happening again.
Find out the cause of this risk.
Is it:
1: Unlikely — Not expected to occur (the lowest Probability)
2: Remote — Not expected, but possible
3: Occasional — May occur intermittently
4: Certain — Expected to occur eventually
5: Frequent — Likely to occur soon and often (the highest
Probability)
EXAMPLE:
Now we take the Impact Score of 3
and the Probability Score of 5 and
multiply them:
3 x 5 = 15
Then check it on the MATRIX.
STEP 4: MULTIPLY THE SCORES AND
EVALUATE THE RESULTS
problem:
FACTS:
1. Gelatissimo Icecream Corner, after reviewing their financial report, found out
that there profit goes down for more than 60% compared to last month’s
financial report.
2. After observing for a week in their shop, the owner have noticed the following:
– The customers entering the shop was lessened by 40%.
- There is a newly opened Ice cream parlor shop just 10 meters away from their store.
- Their products were not anymore attractive to the customer because of the new
trends.
- 6 out of their 10 icecream products are not earning profits because according to
product research, these are cliché and ordinary looking products.
You are task to analyze the risk of your
business. How will you make a risk
management strategy?
1. What is the cause of risk in the Gelatissimo Icecream Parlor?
2. What is the type of risk?
3. From the “LaConte’s Strategic Risk Severity Matrix,” how will
you rate the impact of the risk to the business?
4. How about the Probability?
5. What is the overall scoring?
CALCULATE THE RISK:
ANSWERS:
1. ECONOMIC CAUSES.
2. STRATEGIC RISK/ COMPETITIVE RISK.
3. 5 – Major because it is already affecting the company at a large
rate.
4. 5 – Frequent because this will be affecting the company for the
next months if not addressed.
5. 25- Critical (Immediate action required).
AFTER CALCULATING THE RISK, TREAT
THE RISK TO YOUR BUSINESS
Unit 8: John Jee Jamore
OPTION A:
Avoid the risk
- If it's possible, you may decide not to
proceed with an activity that is likely to generate
risk. Alternatively, you may think of another way
to reach the same outcome that doesn't involve
the same risks. This could involve changing your
processes, equipment or materials.
OPTION B:
Reduce the risk
-You can reduce a risk by:
reducing the likelihood of the risk happening - for example,
through quality control processes, auditing, compliance with
legislation, staff training, regular maintenance or a change in
procedures
reducing the impact if the risk occurs - for example, through
emergency procedures, off site data backup, minimizing
exposure to sources of risk, or using public relations.
OPTION C:
Transfer the risk
-You may be able to shift some or all of the responsibility for the risk to another
party through insurance, outsourcing, joint ventures or partnerships. You may also be
able to transfer risk by:
cross-training staff so that more than one person knows how to do a certain task and
you don't risk losing essential skills or knowledge if something happens to one of your
staff members
identifying alternative suppliers in case your usual supplier is unable to deliver
keeping old equipment (after it is replaced) and practicing doing things manually in
case your computer networks or other equipment can't be used.
OPTION D:
Accept the risk
-You may accept a risk if it can't be avoided,
reduced or transferred. Other risks may be extremely
unlikely and therefore too impractical or expensive to
treat. However, you will need to develop an incident
response plan and a recovery plan to help you deal
with the consequences of the risk if it occurs.
PROBLEM CONTINUATION…