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The Importance Of Identifying Risk

Updated on August 7, 2014

Importance of managing risk.


Corporations face many different risks when conducting business. The businesses that manage risk efficiently create a competitive advantage over others. The main aspect of risk management is to control the losses the company receives because of uncontrollable factors and influences. Risk is the uncertainty and unknowns of business transactions and operations. Risk is a part of business and companies will need to implement policies to manage risk in many aspects of their decisions.

Risk involved with modification.


The companies that spend on office automation, new technologies, more efficient systems, and better communication are taking risks. These items will add cost to the business but the uncertainty is the amount of efficiency they will add to the organization. Companies that choose not to add these items to their business are taking the risk of losing a competitive advantage and operating less efficiently than their competition. The key to staying on top of a competitive industry is to become as efficient as possible. The decision that the risk management team must make about organizational risks is the cost-benefit analysis. If the updated equipment will have more benefits than the cost, then the company should implement it.


Benefits of managing risk

This risk can be managed by strategic planning, hedging, alternative solutions available, and staying prepared. The company can have plans in place to react quickly to different scenarios. This will save the company time and money by limiting downtime and disrupted operations. If a company must wait until they can solve a problem, then they will disrupt operations and decrease productivity until the solution is found. The company risks the chance they will not be able to provide the products or services they are supposed to and that can cause customers to use their competitor’s products or services. Consumers that have to search for their favorite products will eventually switch to a brand that is more available. Companies want to retain loyal customers because it is cheaper than finding new customers. Increases in advertising, promotions and discounts will be necessary to attract new customers to the company’s products. Planning for problems and different scenarios will help the company retain customers and ensure their products or services are available.


Importance of setting the correct price for products


Changes in the price of raw materials, labor, or any other variable cost will affect the cash flows received by the company. This risk should be considered when choosing a price for a product or service. Output prices like transportation, marketing, promotions, and creating awareness of a product or service will also affect the cash flows received for the products or services. Many factors influence the cost of inputs and outputs and many of them are beyond a company’s control. Companies must evaluate many risk factors into their decisions making process when they are pricing products or services. This will help ensure their cash flows are not affected to a point in which the product or service becomes not profitable.


Extending credit for products.


Selling products on credit involves risk that the customer will not or cannot pay back the loan on time or at all. The money owed to a company from extending credit to customers is the accounts receivable section on the company’s income statement. Companies sell on credit to help increase revenues and increase their customer base. Companies must do thorough credit checks to ensure the clients have the ability and finances to pay back money loaned on credit. A company that has trouble collecting accounts receivable will lose the advantages of extending credit or will have trouble paying back their own debts.


Assets need to be covered by insurance.


 Companies that lose assets because of damage and theft will lose the revenue of those assets and will have to count them as a loss. Legal actions can cost companies money and cause a bad reputation that will cost more money to repair. Workman’s compensation forces a company to continue paying employees who can no longer be productive for the organization. Death or serious illness caused by company negligence will cost the company money by fines or lawsuits. It is very important for companies to have insurance to cover losses from pure risk.

Identifying and managing risk


Risk is relevant in every industry. Many factors influence decision making and the management of risk. Risk is a part of every aspect of business. Companies must be aware of all forms of risk and manage it efficiently. The company should have insurances to cover loss, strategic plans to control losses, and make decisions based on outcomes influenced by risk. The companies that manage risk efficiently will be the companies that have longevity.


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