Risks in any business are inevitable and they cannot be eliminated completely. But an entrepreneur can control and minimise their negative consequences by adopting a suitable risk management strategy. The various methods that may be used for handling business risks are as follows:-
- An entrepreneur can avoid some of the risks by analysing the potential results (losses or gains) of the activity that gives rise to those risks. The risk is worth taking if the outcome ultimately benefits the firm. Otherwise, such an action should be avoided as far as possible. The risk may be avoided by substituting the risky process with a relatively safer alternative.
- If the entrepreneur cannot avoid the risk, he should try to control and minimise the losses arising from the risk. This can be done through efficient planning and proper risk management techniques. The main techniques that can be employed by a firm are as follows:-
- Many business risks arise due to errors in planning. Thus scientific forecasting and marketing research of future economic conditions can help the management to make appropriate plans for the enterprise in advance. This will make them aware of likely opportunities and threats to the business environment in future. Accordingly, the entrepreneur can make required changes in its products, prices of the products, its distribution channels and sales promotion techniques.
- A firm can reduce the losses arising from technological obsolescence through continuous technological research and development in the organisation. Thus, it can develop new and remunerative products before the present products become obsolete.
- Credit screening and control through careful screening of the customers; prompt collection of the outstanding debts and tight inventory control will also help the firm to reduce the amount of risks.
- Various safety programmes like:-
- Fire fighting equipment and sprinkler system will help in preventing the losses caused by fire
- Burglar alarms, night watchman, and safety vaults will help in reducing thefts, burglary, etc
- Cold storage or refrigeration will help in preservation of perishable products of the firm and thus reduce the damages caused to the products
- Special packing will help in reducing any spoilage, breakage or leakage of the goods in transit or storage
- Proper pest control methods will also help in reducing the damages caused to the products
- Safe work environment including adequate lighting, covering of damaged floors as well as proper medical care facilities will help in reducing the number of accidents in the factory.
- Risk of competition can be reduced through collective action by the competing firms which may agree to restrict output, allocate markets or charge uniform prices.
- Proper Government action through appropriate policies and regulations can also help in stabilising the economic environment and thus reducing the business risks.
- An entrepreneur must assume the possibility of certain risks which are inherent in any form of business organisation. Such risks can be handled through proper planning and adopting two possible strategies. These are:-
- Shifting the risks to the people who are skilled in managing them and are willing to bear them. The risks may be transferred or shifted through:-
- Sharing the risks with other people so as to minimise the burden on the firm. Generally pooling of the investment of a large number of persons into the organisations helps in spreading the risks over a large number of shareholders. However, insurance is the most important and prevalent device for risk sharing.
'Insurance' may be defined as a contract in writing under which one party agrees to indemnify the other party against a loss or damage suffered by it on account of an uncertain future, in return for a consideration called 'premium'. The person/business who gets its life/property insured is called 'Insured/Assured'. The agency which helps in entering into an insurance arrangement is called 'Insurer' or 'Insurance company'. The agreement or contract which is put in writing, is called a 'policy'. An insurance policy provides the following benefits to a business concern :-
- Protection :- it provides protection against risk of loss and a sense of security to the businessmen.
- Diffusion of risks :- as the burden of loss is spread over a large number of people.
- Credit standing :- of the firm is enhanced as the businessman can easily transfer some of his risks to an insurance company.
- Continuity and certainty of business :- if all the risks were to be borne by the businessmen themselves, the business operations would have been uncertain and halting in character.
- Better utilisation of the capital of the firms :- as the Insurance companies take over the risk, it enables the business firm to invest and optimally utilise its capital.
For more details visit our Section on 'Managing a Business'
Risks are inseparable from a business and affect its profitability both in short and long term. Thus, an effective risk management strategy is necessary for a successful business organisation.