Business Studies XII Content
Meaning of risk management
Risk management means the possibility of losses due to uncertainty. Business organizations are closely associated with risk. There are various events of circumstances or factor that may have negative impact of the operation or profitability of an organization. As we know, higher the risk, higher the gain. If the business organization takes lower risk the volume of profit also will be low. The risk management has crucial role to achieve organizational goal. So the management if risk in an organization is very necessary for the success of business.
Type of risk
1. Managerial risk: It arises from managerial weakness. If the management fails to take effective plans and policies then such risk is affected in the organization. Wrong estimation of demand and supple for management unfair business activities are the examples of business risk.
2. Compliance risk: The risk that arises from the frequent changes in laws and regulations related to business is called compliance risk. Business must always follow the rules and regulation issued by the governing authority. The rules and regulations against business environment then such risk affect business.
3. Financial risk: Financial risk is one of the major risks of business. It arises from various financial transactions. Non payment of debtors in time, increase on business loan, shortage of money and working capital are the examples.
4. Operational risk: It arises from the weakness of people, internal process and external events. Organization may suffer from different danger of operation.
5. Other risks: Many other risks also can arise in the organization which can affect the business performance. Such risk are
a. political risk
b. liquidity risk
c. market risk
d. credit risk
e. interest rate risk
f. foreign currency risk
g, health and safety risk
Risk management procedure :
1. Identification of risk: Risk identification is an essential step in management of risk. In this stage the possible source of risk is identified and named. While identifying the risk, the source is also examined in order to analyze the possible output
2. Assessment of risk: Organization evaluates the risk after identifying the potential risk associated with concerned business. It is calculated from previous data and event. The possible chances of risk is high and damage more, the primary attention is given. So, if the chance of occurring is low minor attention is given
3. Select the technique: Different tools and techniques are available for managing the risk. The third stage is to select the appropriate technique as per the requirement based on cost and benefit, appropriateness, health and safety and future impact.
4. Implement and control: After assessment of risk, management and implement the action and use the suitable technique. It can be implemented as avoiding, transferring, avoiding and mitigating the risk.