Typical Risks a School Bus Service Business Would Be Exposed to - Example

School Bus Service Business [Student’s Name] [Course Title] [Instructor’s Name] 13 October, 2011 Abstract The purpose of this report is to perform a preliminary risk assessment of the typical risks a school bus service business would be exposed to, in addition to provide explanation of findings to the management. The report makes a research on a range of risks that are typical to school bus service business. The report ensures compliance with AS/NZS 5050:2010 Business Continuity – Managing disruption-related risks, AS/NZS ISO 31000:2009 Risk Management – Principles and guidelines and HB 436:2004 Risk Management Guidelines. Part A: Analytical Report Introduction It is essential for a business to have a risk assessment of the typical risks that would be exposed to a business of its type. This requires the performance of a thorough work-place assessment whereby researches on a range of risks that are typical to the business are carried out. A business needs to have an appropriate risk management system in order to have effective management of risks (Aaker, Brumbaugh & Grier, 2000). For instance, a safe and sound workplace reduces the instances of risks. Core Activities There are several activities that the client undertakes to meet its operating objectives. However, the main core activity of the business is transporting students to and from school. There are other activities that are carried out, which are related to school’s activities. They include: I. Delivery of school supplies such as food stuffs and stationery II. Tour services III. Emergency cases like sickness Risk Categories The various risk categories in this business include: Financial versus non-financial risks Pure versus speculative risks Fundamental versus particular risks Business risk Operating versus non-operating risks According to Bennett (2010), financial risks are those risks whose outcomes can be measured in monetary terms such as material damage to property after fire or theft of goods. Non-financial risks are risks whose outcomes, though undesirable, may not be quantified in monetary terms, such as choices of wrong business opportunity or loss of items with sentimental attachment, such as a locket given by a loved one. Pure risks involve loss or break-even situations. The risks might not only be unfavourable, but also may leave a person in the same position she or he enjoyed before the occurrence of the event, such as fire or burglary risks. Speculative risks involve loss, break-even and the possibility of gain (Chance and Brooks, 2009). Examples of these risks include buying shares or inventing new products. Fundamental risks are risks whose cause is beyond the control of human beings and which are indiscriminate in their effects. They, therefore, are impersonal in origin and consequences. In this connection, hurricanes and earthquakes are fundamental risks. However, particular risks are personal in origin and consequences. Examples of particular risks include fire, theft and motor accidents. Business risk is the risk facing the firm due to its inability to cover operating costs. This is a serious risk exposure since it can result to the business being declared bankrupt. Clarke (2003), states that if the revenue generated by the business is not enough to meet the cost of its operations, it means that the firm is operating at a loss. These risks include liquidity risk and credit risk. Operating risks are risks which the business is exposed to due to the activities it is involved. These risks are incurred in the course of doing the activities of a kind which is normally taken by the business. These risks are as a result of breakdown of internal procedures, systems and even people (Clinard and Meir, 2008). Examples of these risks include motor vehicle accidents in the course of transporting students to and or from school. Operating risks can be seen to be human risks since it involves the failure of business operations as a result of a human error. These risks are not inherent in systematic, financial or market-wide risk. Non-operating risks are risks which materialize but are outside the main activity of the kind normally carried out by the business. These risks are normally caused by third parties outside the business carried by the owner. These include theft and intentional damage to goods and property by a third party. Identification and Gathering of Risk Categories and Risk Information Several methods have been used in order to identify and gather the category and risk information. These methods include: I. Loss data analysis: data from insurance companies, incident reports, internal loss runs and accident reports show incurred losses and other information from which a trend analysis is made. This information, though past, forms a solid benchmark that is used to forecast a future loss (Collins and Porras, 1998). II. Flowchart: flowchart was used to show the business activities, which helped to identify exposures, hazards and perils. Transport analysis showed that students are the most likely to board the bus since they are transported to and from school. Safe drive depends on other factors like condition of the bus and the traffic. Furthermore, site analysis shows that there is so much traffic during morning hours and at evening (rush hours). III. Experts: holding a discussion with experts helps to identify and gather the risk category and risk information. Their opinions were useful since they shed light on the possible risk exposure of a school bus service business (Gale, Abraham and Krell, 2005). IV. Physical inspection: the bus was inspected to identify any risk exposure that may usually go unnoticed. V. Compliance reviews: these are obtained free of charge, for instance, from the Fire Marshall. They are a reliable source of information on risk exposure. VI. Insurance policy review: this is essential in determining possible risk exposures and risk perils. VII. Policies and procedures review: this helps to identify how the business functions. Every organization has its own internal politics, for instance, there may be an opportunity for exposure identification, but the politics of the organization may hinder effective risk identification. VIII. Financial statement analysis: this helps to identify business risk exposures, financial capabilities, valuation and financial based decision making. It assists in making financial loss forecasts from a certain event, which forms the basis of developing contingency plans to avert the crisis. IX. Checklist and survey: a checklist of various risks was used to check against the risks which are relevant to school bus service business. Measurement difficulties Some of information which is relevant and reliable is not available for the timing and or likelihood of a risk event, and its potential impact. Some of the perceived measurement difficulties for operating risks include: Reputation risk: it is difficult to determine the extent to which the goodwill of the business has been affected. Hilton (2004) states that goodwill is an intangible asset to the business. A loss in reputation means a loss in business confidence. A default measure in goodwill will portray inaccurate position of the business. This difficulty can be overcome by carrying out a customer survey to establish the switching pattern. Customers who have switched to another school bus service provide will point to the loss of goodwill of the business hence reputation risk. Fraud risks: it is exceedingly difficult to determine fraud committed by employees of the firm. This is because such information tends to be hidden by the same employees who are engaged in fraudulent activities. This difficulty can be overcome by ensuring there is a distinct department dealing with control accounts. This will help to expose any embezzlement of funds by the employees (Johnston and Clark, 2008). It can also be overcome by contracting an independent external auditor. Legal risk: sometimes a change in Government rules and regulations can render certain activities illegal. Therefore, any business of the kind needs to be stopped henceforth (Nelson, 2006). It is difficult to determine such eventualities; therefore, it affects the measurement of this risk. This difficult can be overcome by analyzing the political climate and the proposed changes in the business sector. Political risk: it is difficult to determine the internal politics of an organization before it happens. This difficult can be overcome by considering areas of disagreements within the organization, which will give light to the possible cases of conflict in the organization. Liability risks: uncertainty holds for the occurrence of a liability suit. The amount of damages awarded is discretion of the court, which makes it difficult to measure this risk exposure. However, it can be overcome by considering the previous ruling by the courts of law to determine the likely damages to be awarded. Environmental risks: it is sometimes difficult to predict changes in the environment which have a direct impact to the business of the kind carried out by the business. Weather changes can affect the smooth running of the business, which impacts negatively on the business. This difficult is overcome by using the weather forecast reports and establishing a trend analysis. Profit risk: existence of expenses that were unforeseen by the business, and which are chargeable against the profit of the company, make measurement of this risk difficult. This can be solved by considering the overall change in the economy, which can give a clear picture on the likely increases in the cost of commodities and other relevant expenses. Risk Matrix In the risk matrix, risks are shown by the rows while the likelihood of risk materializing and the potential impact is shown by the columns. This would allow easy determination of risk severity if an event occurred. If figures are attached to likelihood and potential impact, it will show the risk that will cause the greatest loss to the business. The risks are then prioritized on the basis of their score, starting with the risk having a high score. For instance, if an accident occurred involving the school bus, some students might suffer from shock and faint. This is an insignificant impact and students may be given first aid. Other students might sustain minor injuries, which may need medical attention from a professional. This constitutes a minor impact. In other cases, some students may sustain significant injuries, which may not be permanent. This is a moderate impact as it may necessitate hospitalization of the victims. In an advanced stage, some students might incur extensive (permanent injury), for example, loss of hands, or breaking a leg. This is a major impact and the consequences might also be devastating. In its extreme measure, there may be loss of life. This is considered catastrophic and attracts high court damages and other legal proceedings. Three Highest Priority Risks Reputation risk: school bus service depends so much on the goodwill of the business; therefore, a poor reputation will ruin the business of the organization. Profit risk: the business is driven by profit making objective; therefore, if the main objective is threatened, then the business is threatened. Liability risk: the industry in which business is operating is exposed to high liability suit from third parties, which may cause the business to encounter a financial crisis. Risk Treatment Risk is pervasive, and; therefore, organizations must find proper ways of dealing with it (Oberuc, 2004). There are different methods that are used to handle risks. They include avoidance, retention, reduction or risk transfer. Reputation risk is mitigated by retention. Some funds should be set aside which can be used to boost the public image of the business through public relations and other means of promotion. Profit risk can be treated by reduction. The organization should take appropriate “pre-loss minimization” steps to ensure that the frequency and or the severity of the loss are reduced to the minimum. Liability risk is best treated through insurance. An insurance company will accept to run the liability risk facing school bus service business in return of a premium consideration. Recommendations on Managing the Three Highest Priority Risks It is recommended in this report that liability risk is managed through risk transfer mechanism to the insurance company. This is because third party liability insurance is compulsory for any motor vehicle operating on the road. This is crucial because some of liability suit attracts high court damages, which if awarded may cause the business to be in financial problems. Transfer of such potential risks to an insurance company helps to smooth the income of the business. However, the company will incur extra expenses for the premium consideration charged by the insurance company. The report recommends that the client retains and reduces reputation and profit risks respectively. This is because reputation risk may not be treated effectively through transfer mechanisms. It relies heavily on the effort of the business to regain business confidence through portraying good public image. It is possible for the business to reduce instances that threaten its profit hence profit risk can be treated through risk reduction. However, this method may not be effective since the business may not have accumulated enough funds to absorb the risk when it materializes. Means of Monitoring and Evaluating the Success of Client’s Risk Management System The client will know will know whether each of the three top priority risks is being managed well through the following ways: The switching patterns of customers from the client to its competitors will decline, and its market share will improve due to its strong reputation. The net profit of the business will increase – an indication that profit risk is managed well. The costs incurred due to the damages awarded by the court in respect of liability suit will decline since this is settled by the insurance company. Means of Monitoring and Evaluation by the Employer The employer will know that I am effectively helping the client through the following ways: If the client expresses his satisfaction with the work I am doing, which may entail the client making a recommendation for a job well done. If the client refers other customers for my service, it will be an indication of confidence the client has in my services. APPENDICES Part B – Risk Documentation Risk Register1 Risk Category Specific Risk Significance (consequence) Likeli-hood Risk Score (Gross) Strategy To mitigate the risk Risk State Contingency Plan Financial Risks Theft of school bus 5 1 5 Insure Rising Review priority in Strategic plan and substitute with an effective combination of risk treatment Pure risks Fire 5 1 5 Insure Declining Fix fire fighting equipment Speculative risks Buying shares 4 3 12 Retention Static Reassess programme portfolio and revise target intakes. Fundamental Risks Earthquakes 4 1 4 Reduce Declining None Particular Risks Motor vehicle accident 3 5 15 Insure Declining Have a first aid box in the bus Business Risks Loss of profit 5 4 20 Retention Declining Arrange overtime, recruit short-term employees. Operating Risk Reputational Profit Legal Fraud Liability Systemic Environmental Political Business interruption Theft Fire Volatility Settlement Delaying students Unviable opportunity 5 5 3 2 5 2 1 4 5 5 5 4 3 5 5 4 5 3 3 5 4 4 3 3 2 2 3 4 3 1 20 25 9 6 25 8 4 12 15 10 10 12 12 15 5 Retention Reduction Insure Insure Insure Reduce Retention Reduction Retention Insurance Insurance Retention Reduction Reduction Avoidance Rising Declining Static Declining Declining Static Rising Declining Declining Rising Declining Declining Static Declining Eliminate Engage in rigorous promotion activities Minimize on the cost Compliance with rules Establish control account dept Handle outside court system None Monitor trend in weather Solve internal conflicts Fix alarms on the bus Fix fire-fighting equipment Monitor market trends Make business survey Investigate the place Review transport schedule Consider another business opportunity Risk Matrix2 Potential Impact Likelihood A-Very Insignificant Handled through first aid B – Only Minor Medical attention needed from a hospital personnel C – Just Moderate Very significant injury but not permanent. D – Major Extensive and permanent injuries (e.g. complete vehicle damage) Need to purchase another bus E– Disastrous Death or may be Permanent disabling injuries, for instance, blindness, loss of legs among others. RISKS 1 - Likelihood of occurrence is almost certain High- H High - H Extreme - X Extreme - X Extreme - X 2 - Frequent occurrence Moderate - M High - H High - H Extreme - X Extreme - X 3 - Possible and likely to occur at some time in future Low - L Moderate - M High - H Extreme (X) Extreme - X 4- Occurrence is very unlikely Though it may occur Low - L Low - L Moderate - M High - H Extreme - X 5 - Occurs in very rare circumstances Low - L Low - L Moderate - M High - H High - H References Aaker, J., Brumbaugh, A., & Grier, S., 2000. Non-target Markets and Viewer Distinctiveness: The Impact of Target Marketing on Advertising. Journal of Consumer Psychology, 9(3), p.127. Bennett, A., 2010. The Big Book of Marketing: Lessons and Practices from the World's Greatest Companies. New York: McGraw-Hill. Chance, D. M. and Brooks, R., 2009. Introduction to Derivatives and Risk Management. New Delhi: Cengage Learning. Clarke, A., 2003. Negligence: a practical learning approach. Butterworth: LexisNexis. Clinard, M. B. and Meir, R. F., 2008. Sociology of Defiant Behavior. New Delhi: Cengage Learning. Collins, J. and Porras, J., 1998. Built to last: successful habits of visionary companies. London: Random House. Gale, J., Abraham, D. and Krell, T., 2005. Organizational transformation and e-business implementation. Journal of organizational change management,18(2), p.13. Hilton, R. W., 2004. Managerial Accounting: Creating Value in a Dynamic Business Environment. New Delhi: McGraw-Hill Publisher. Johnston, R. and Clark, G., 2008. Service operations management: improving service industry. New York: Prentice Hall. Nelson, B. L., 2006. Law and ethics in global business: how to integrate law and ethics into corporate governance around the world. Sydney: Taylor & Francis. Oberuc, R. E., 2004. Dynamic portfolio theory and management: using active asset allocation to improve profits and reduce risk. New York: McGraw-Hill Professional. Rosen, S., 1974. Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition. The Journal of Political Economy, 82(1), pp.34 – 55. Viswesvaran, C., 1996. Comparative analysis of the reliability of job performance ratings. Journal of Applied Psychology, 81(5), pp.557-574. Read More