CHAPTER 12

PRACTICAL GUIDELINES
IN REDUCING AND
MANAGING BUSINESS
RISKS
DIAZ MALAZA
UNDERSTAND THE
NATURE OF RISK
The willingness and readiness to take
personal and financial risks is a defining
characteristic of the entrepreneurial
decision-maker.

Accepting that risks exist is a starting point

for the other actions needed, but the most
important is to create the right climate for
risk management.
IDENTIFY AND
PRIORITIZE RISKS
Identification of significant risks both
within and outside the organization is
crucial and allows to make informed
decisions.
Examples of significant risks might be the
loss of a major customer, the failure of a
key supplier or the appearance of a
significant competitor.
 TYPICAL AREAS OF
ORGANIZATIONAL RISK
FINANCIAL Inefficient cash management, Fraud, Accounting
decisions and practices

Poor brand management or handling of a crisis,

COMMERCIAL Failure to comply with legal regulations or codes
of practice, Market changes
Marketing, pricing and market entry decisions,
STRATEGIC Resource building and resource allocation
decisions
Failure of plant or equipment, Accidental or
TECHNICAL negligent actions

Product or design failure, including failure to

OPERATIONAL maintain supply, Corporate malpractice
CONSIDER THE ACCEPTABLE
LEVEL OF RISK

The usual first step is to determine the

nature and extent of the risks the
business will accept.

There is also an opportunity cost

associated with risk: avoiding risk may
mean avoiding a potentially big
opportunity.
UNDERSTAND WHY RISKS
BECOME REALITY

Upon identification of risks, they can be ranked according to their

potential impact and the likelihood of their occurrence in order to
highlight:

a. Where things might go wrong and what their impact would be

b. How, why, and where the risk catalyst might be triggered
Types of Risk Catalyst

Technology - new hardware, software or system configurations; traffic

congestion change introduced by the Metro Manila Development Authority
(MMDA) Chair

Organizational change - new management structures or reporting lines,

new strategies, commercial agreements like mergers

Processes - new products, markets, and acquisitions

People - hiring new employees, poor succession planning, weak people

management, behavior - laziness, fraud, human error

External factors - changes in regulation and political, economic, or social

developments; economic disruption brought by the pandemic
APPLY A SIMPLE RISK
MANAGEMENT PROCESS
Assess and analyze the risks resulting from a decision by systematically
identifying and quantifying them.
Consider how best to avoid or mitigate them.
In parallel with the second stage, take action to manage control and monitor
the risks

A. Risk Assessment and Analysis

Assessment of risk differs from one company to another. For example, there are
risks that can be solved using past experience. There are also those that are harder
to assess or quantify. When a company is focused on meeting short-term
expectations, risks with little likelihood of occurrence in the next five years may not
be so impatient to such company.
B. Risk Management and Control

Risk management procedures and techniques should be well documented, clearly

communicated, and regularly reviewed and monitored.

ABILITY TO CONTROL RISK

No control

Weak control

Significant control

Total control

Minor Significant Major Critical

POTENTIAL IMPACT
AVOIDING AND MITIGATING RISKS

Reduce or eliminate those that result only in costs.

Can be achieved through quality assurance programs, environmental

control processes, health and safety regulations, accident
prevention and emergency equipment installation, and security
measures to prevent crime, sabotage, espionage and threats to
people and systems.

Can also be reduced or mitigated by sharing them - ex: acceptable

service agreements from vendors
CREATE A POSITIVE CLIMATE FOR
MANAGING RISK

The ethos of an organization should recognize and reward

behavior that manages risk.
OVERCOMING THE FEAR OF RISK

Taking risk is needed to keep ahead of the competition.

See risk as an opportunity, not a threat.

Risk is both desirable and necessary. It provides

opportunities to learn and develop and compels people
to improve and effectively meet the challenge of
change.
C. CONTROLLING AND MONITORING
ENTERPRISE-WIDE RISK

Guide Questions

Where are the greatest areas of risk relating to the most significant
strategic decisions?

What level of risk is acceptable for the company to bear?

What are the potentially disclosing events that could inflict the
greatest damage on your organization?
What are the risks inherent in the organization’s strategic decisions, and what is the organization’s ability to
reduce their incidence and impact on the business?

What is the overall level of exposure to risk? Has this been assessed and is it being actively monitored?

What are the costs and benefits of operating effective risk management controls?

What review procedures are in place to monitor risks?

Are the risks inherent in strategic decisions adequately understood?

At what level in the organization are the risks understood and actively managed? Do people fully realize the
potential consequences of their actions, and are they equipped to understand, avoid, control or mitigate
risk?

To what extent would the company be exposed if key staff left?

If there have been major developments, are the new responsibilities understood and accepted?

Are management information systems keeping pace with demands? Are there persistent black spots black
spots – priority areas where the system needs to be improved or overhauled?

Do employees resent risk, or are they encouraged to view certain risks as opportunities?
 PRACTICAL
CONSIDERATIONS IN
MANAGING AND REDUCING
FINANCIAL RISK
 Practical Considerations in
Managing and Reducing Financial
Risk

Finance is the lifeblood of a business.

Profitability, cash flow, long term

shareholder value and risk all need to be
considered when setting and reviewing
strategy.
 This section provides practical guidance about
financial decisions and explains how to:

improve profitability;
avoid pitfalls in making financial
decisions;
reduce financial risk.
.
1. Improving Profitability

Entrepreneurial flair and financial rigour

are as much about attitude as skill.
Nonetheless, certain skills will ensure
that decisions are focused on
commercial success.
A. Variance Analysis

This is used to monitor and

manage the results of past
decisions, assess the current
situation and highlight solutions.
B. Assessment of Market Entry and Exit Barriers

How easy or difficult it is to enter

or leave a market is crucial in
strategic decision-making.
 Assessment of Market Entry and Exit Barriers

When markets are difficult or costly

for competitors to enter and
relatively easy and affordable to
leave, firms can achieve high,
stable returns while still being able
to leave for other opportunities.
C. Break-even Analysis (CVP Analysis)

This is used to decide wether to

continue developing a product,
alter the price, provide or adjust
a discount, or change suppliers
to reduce costs.
Break-even Analysis also helps in managing:

sales mix
cost structure and production
capacity
forecasting and budgeting
Break-even Analysis

The break-even point is when

sales cover costs, where neither a
profit nor a loss is made.
D. Controlling Costs

Focus on the big items of

expenditure.

Be cost aware.

Maintain a balance between costs

and quality.
D. Controlling Costs

Use budgets for dynamic

financial management.

Develop a positive attitude to

budgeting.

Eliminate waste.
Practical Techniques to Improve
Profitability

Focus decision-making on the most

profitable areas.

Decide how to treat the least

profitable products.

Make sure new products enhance

overall profitability.
Practical Techniques to Improve
Profitability

Manage development and

production decisions.

Set the buying policy.

Consider how to increase

profitability by managing people.
Practical Techniques to Improve
Profitability

Consider how to create greater

value from existing customers and
products to enhance profitability.
2. Avoiding Pitfalls

Many managers have financial

responsibilities and their decisions
will often be influenced by or have an
impact on other parts of the business.
The following principles will help avoid
flawed financial decision-making.

Financial expertise must be widely

available

Consider the impact of financial

decisions

Avoid weak budgetary control

The following principles will help avoid
flawed financial decision-making.

Understand the impact of cash flow

Know where the risk lies

3. Reduce Financial Risk Positive Replies to
the following Questions would assist Top
Management to Manage Financial Risk

Are the most effective and relevant

performance measures in place to
monitor and assess the
effectiveness of financial decisions.
Have you analyzed key business
ratio recently? How useful are your
performance indicator? What are
the main issues? Are you measuring
the right things?

Is there a positive attitude to

budgets and budgeting?
Does decision-making focus on the
most profitable products and
services, or is it preoccupied with
peripheral issues?

What are the least profitable parts

of the organizations? How will they
improved?
Are market and customer decisions
focused on improving profitability? Too
often, attention if given to non-financial
objectives, such as increasing market
share, without adequately considering
the financial risks and alternatives.

How efficiently is cash managed? Do

your strategic business decisions take
account of cash considerations, suchas
the time value of money.
THANKS FOR
LISTENING