The risk origin. Risk can sometimes originate in one process of an organization but impact other processes. As a result, management recognizes and controls these enterprise-wide risks to maintain and improve performance. Identifying, measuring, and responding to risk that may affect the achievement of an entity’s strategy and business objectives facilitates creating, preserving, realizing, and minimizing the erosion of an entity’s value. Risks detected at the transactional level may be just as harmful as those identified at the entity level.
Risk Origin: Causes, Sources And Consequences
Enterprise risk management enables organizations to increase their ability to identify new risks and plan suitable actions, reducing surprises and associated costs or losses and benefitting from favorable developments. Furthermore, the organization can discover the reasons and sources of risks through logical identification and integration. There are various sources from which risks originate, such as regulatory requirements, including laws, policies, procedures, changes in economics and political factors, and other internal factors related to human resources.
Risks detected at the transactional level may be just as detrimental as those identified at the entity level. Risks might impact a single operating unit or the whole institution. They may be highly correlated with business environment variables or other hazards. Furthermore, risk responses may necessitate large infrastructure investments or may be accepted as a cost of doing business. Because risk comes from a variety of sources, numerous solutions from within the company are necessary.
Emerging Risks
Emerging risks emerge as the business context shifts, and they can potentially influence the entity’s risk profile in the future. It should be noted that emerging risks may not be sufficiently understood enough to effectively identify and assess them from the start, necessitating more frequent reidentification. Organizations should also disclose new information about developing risks as it becomes available. Identifying new and emerging risks and changes in existing risks allows the organization to look and plan ahead to allow time to analyze the possible severity of the risks and capitalize on these developments.
As a result, having time to examine the risk allows the organization to anticipate risk response or, if necessary, review the entity’s strategy and business objectives. Some risks may remain unknown risks for which the organization has no reasonable expectation of considering during risk identification.
Occurrence Of Risk
The occurrence of risk incidents may have financial, reputational, operational, strategic, and legal consequences. Because the risks may have effects that affect one operational unit or the entity as a whole, they may be highly associated with factors in the business context or with other risks. Furthermore, risk responses may necessitate large infrastructure expenditures or may be accepted as a cost of doing business. Because risk comes from several sources, various actions are necessary at all levels and across the entity.
This framework component focuses on practices that support the organization in making decisions and achieving strategic and business objectives. Therefore, organizations use their operating structure to develop a practice that: identifies new and emerging risks so that management can deploy risk responses promptly; assesses the severity of risk, with an understanding of how the risk may change depending on the level of the entity; prioritizes risks, allowing management to optimize the allocation of resources in response to those risks; identifies and selects responses to risk; and develops a portfolio view to enhance the ability of the organization to articulate the amount of risk assumed in the pursuit of strategy and entity-level business objectives.
The practices are performed across all levels and with responsibilities and accountabilities for appropriate enterprise risk management aligned with the severity of the risk.
What Are The Different Sources Of Business Risk?
Running a business entails some level of risk, and no company can completely eliminate risk. A company, on the other hand, can control or at least successfully manage risk. To do so, management must make decisions and make choices about acceptable risk levels in relation to potential profits. In this context, any business must consider a variety of sources of risk, including market risks, employee-related risks, and financing risks.
Risk Management
A company must inevitably assume some level of risk in order to generate satisfactory returns on investments for its stockholders. The key to successful risk management is to maintain a good risk-reward balance, which entails carefully weighing potential profits against potential problems or threats to operational stability.
Understanding potential risks and having contingency plans in place to deal with problems that may arise are important aspects of risk management. For example, if a company’s management anticipates that it will require additional financing to complete an expansion project, having a backup source of financing available is good risk management if the company’s primary financing source is unwilling to extend the company additional credit.
Operating Profit
The company’s primary source of risk is the marketplace in which it operates. Many market risks cannot be directly controlled; they can only be managed and dealt with to the best of one’s ability. There is a risk, for example, that consumer demands or desires will change, resulting in less demand for the company’s products.
There is a chance that the company’s products will injure someone and lead to a lawsuit. There is a risk that a competitor will introduce a product that makes the company’s product less appealing to consumers, or that a competitor will offer a competing product at a significantly lower price, threatening either sales volume or operating profit margin.
Cash Flow
Financing and cash flow are associated with numerous business risks. A business may be unable to secure the necessary funding for an expansion project. Customers of the company may experience financial difficulties that prevent them from paying invoices on time, disrupting the company’s cash flow. Suppliers may unexpectedly raise prices, causing the company to have insufficient working capital or cash flow or causing it to have insufficient inventory on hand when needed.
Employee-Related Issues
Another source of business risk is employee-related issues. Labor issues may arise, affecting a company’s production. Increased wage costs may result from the need to retain certain key personnel. Loss of key personnel can have an impact on the company’s performance and profitability, such as if one of the company’s top salespeople leaves to work for another company or if the company loses a key product designer. Management risk, the risk of a company’s poor management decisions is included in this risk category.
Final Thoughts
Although business risk cannot be completely eliminated, steps can be taken to mitigate its negative impact. A contingency plan (for dealing with problems as they arise) is an essential component of risk management. If demand slows or new competitors enter the fray, the marketplace in which a company operates is a primary source of risk. Another source of risk is when a company has difficulty obtaining financing to begin or continue a project. Labor disputes and other employee-related issues can put a company at risk.
