RISK & RISK MANAGEMENT Article Citation Fenton, Reid & Holm, James (2009) “The Capital” CanWest Digital Media Three Hills, AltaCanada April 8, 2009 Main Issue of the Article The article focuses on the definition of risk management. It identifies the elements of price risks and then goes ahead to make very practical recommendations. The authors define risk as having to do with the future and uncertainty that every business faces in its existence and operation. Due to the fact that we cannot tell what will happen in the future, there is some kind of uncertainty and risk that is inherent in every business. They stress that risks analysis is about the study of variations and the distribution of outcomes from present actions in the future.
In other words, risk analysis looks at the number of possible outcomes that a business decision or action is likely to result in. It examines the various possibilities that the business is likely to face in the future, both the upsides and the downsides. Risk management involves the use of techniques of planning to reduce the negative effects of the uncertainties as they are likely to occur in the future and increase the positive effects for the business. So risk management entails the measurement of the likelihood of a risk occurring and then taking reasonable action to ensure that they either do not affect the business adversely or their effects are reduced drastically to ensure that the business meets its objectives. The authors identify price risks to be the major element of risk management concern in businesses.
This is because prices of goods and services acquired for production and the prices of products sold are necessary in determining the profitability of a business.
They define price risk as any event that causes an unfavorable outcome to the financial health of a business. It varies from fluctuations in prices of goods purchased and changes in the price of products they sell on the open market. Relationship to Course The paper makes practical recommendations about how a business should apply the principles of risk management in real life. It shows that when a business is faced with financial risks, it has to do one of five things. First of all, the business can reduce the probability of the financial risk affecting it.
This can be done by totally avoiding problematic situations and conditions that can adversely affect the finances of the business. This can be done by refusing to deal with high risk partners and the avoidance of high risk situations altogether. Secondly, there is the option of reducing the impact of a given financial risk on a person's business. This can be done by being careful about the extent you go in negotiations and contracts based on the financial risk involved in transactions, particularly those ones you cannot avoid altogether.
Thirdly, they recommend that in some cases, a manager needs to transfer risks to a third party. In other words, when you are in practice as a manager and you identify financial risks, you might want to insure that bit of your business in order to get some kind of cover in the event that the risk actually occurs. A fourth recommendation they make is that a manager can avoid risk drivers as much as possible. This means that a manager can consider outsourcing whenever s/he notices that a risk driver is inherent in a given transaction.
This will ensure that they will steer clear off potentially explosive events and activities. However, in other situations and conditions, there is the need to bear the risks. After all, doing business is about taking risks and profiting from them. There are some risks, especially risks that are related to the core function of the business that cannot be avoided in anyway. In such a situation, a manager must improve core competencies of the business to ensure that those financial risks are handled effectively and efficiently to ensure that optimum profits are acquired. They also recommend that financial risks can be handled by producing what is in demand.
This way, the business will always be sure to make healthy profits. Another option is to increase production so that costs fall. They also recommend the use of insurance in high risk transactions. A manager will be safe if he has a proper awareness of the market and production issues. This way, s/he can do realistic planning and projection and monitor the results.
A risk-management inclined manager will always check the prices of universal drivers like crude oil and the financial/credit markets. They will watch seasonality, exchange rate and vary purchases wherever necessary. Profitability is the guideline for financial risk management. Personal Reflections From this article, I think risk management is the very essence of management. It is a practical urges the manager to stay on the look out for changes in the environmental factors and then make changes as appropriate. Hence, the article gives me a very practical view of how risk management works in the real world. However, there are some inherent difficulties that limits the scientific nature of risk management.
It is clear that no one can forecast the future accurately. This therefore means that in as much as a manager tries to remain current and informed, some uncertainties in the future can make it difficult for him to get his risk management right. This will create major failures and can affect profitability, although the right thing is done. I think that a manager will only have to do his best and try to get information from the most credible sources only.
This way, he can always have the cause to believe in the risk management strategy he is using and get justification for it in spite of the fact that the future cannot be predicted securely.