By Dr B K Mukhopadhyay
As is well known today that business risk and fincial risk are the two important areas that every magement and fince personnel has to take into the fold. While business risk deals more with the strategic decisions of a company, it is fincial risk that is related to the monetary aspects and debt. This business risk, in turn, is more related to the decisions in the context of smooth and profitable functioning of an organization [entering into an entirely new business, buying stake in a company, reducing the stake in a company, introducing new products in the market are the important aspects related to the business risk; as well as the issues regarding getting returns on assets of the company]. Can the decision maker just ignore crucial aspects like: the variability in demand for its products, variability in the input cost, operating leverage, variability of sales price? After all business risk - small or big - is governed by generation of cash to run the operations of the firm on a daily basis. The stern reality: in these days of fast changing business environment business itself is surrounded by ever growing risks. Yes - when Coca-Cola introduced New Coke, it incurred a risk that it ultimately discovered would not be the rewarding change it initially anticipated. Side by side: small business entrepreneurs take even greater risks than large companies. Simultaneously, an entrepreneur can take a number of steps to reduce the impact of risk taking on business operations.
The very are of business risk refers to a circumstance or factor that may have a negative impact on the operation or profitability of a given company. A business risk [sometimes referred to as company risk] can be the result of interl conditions, as well as a number of exterl factors [beyond the control of the company to set right] that may be evident in the wider business community.
In fact the global business environment today has become more complicated – so also global fincial markets - much more uncertain than ever before. The global fincial uncertainties were not entirely unticipated, but, yes, the intensity was not predicted nor was the duration expected and the outlook is far more uncertain now for global situation than before. The declining situation in Euro Zone; the global fincial turmoil emated from the U S sub prime mortgage crisis; topsy turvy oil prices ; gold prices ruling at record high – a few instances out of a good equilibrium / peace disturbing numbers clearly show the need for guarding against uncertainties weighing properly the ability to absorb risk!
Obvious enough: keeping in view the entire goings it is corporate governce area that invites proper attention on: formulation and implementation of required plans, policies and guidelines, code of conduct of directors, Chief Executive and Employees, mechanism to identify related parties, promoters, directors or senior magement and lending to directors, chief executive, employees (except as per employees rules) and their related parties, if any. The need is here now to specifically attach importance to other related aspects as well: adequacy of the Magement Information System (MIS), control in information Technology and related support function; reliability of mechanism used for reporting plus accuracy of such returns; compliance with the prevailing Statute, Act, Directive and Regulations, especially in vital areas like : profit appropriation to general reserve: appropriation to exchange fluctuation reserve, distribution of dividend and of course whether prohibited activities are pursued.
And then, the business risk magement aspects! The task of locating the ever growing risks – hitherto receiving less importance comparatively - has been emerging fast. Some such located areas are not difficult to locate.
For example: the risk that a firm will go bankrupt because of lack of payment of debts is a big business risk. Competition with peer companies is also one of the major business risks faced by entrepreneurs. Competition can force business houses lower the rates of their products which can result into reduced revenues and net profits. Competition also causes a fall in the market share of the company due to the entry of new products. Poor magement is a business risk which can be avoided by changing the board of directors. Enterprise risk magement can be learned only after gaining sufficient experience.
Fincial risk is existing daily - related to the structuring of the finces of an organization, which, in turn, will vary with the ture and type of investment especially when an organization decides to enter into debt from fincial institutions for business expansion along with equity fincing [rise in the interest rates can affect cash flows]. The ever changing foreign exchange rates, especially as being observed presently also add - fuel to the flame - to the fincial risk for a company. Specifically, fincial risks in intertiol business are much more than those involved in domestic business. A continuous tracking of intertiol markets environment can significantly minimise this fincial risk.
Side by side: the ongoing business environment calls for countering concentration risk as well. Concentration may arise in a particular market, industry, region, tenor or trading strategy. It is well known that diversification is one of the cornerstones of risk magement. Just as professiol gamblers limit their stakes on any one hand to a small fraction of their net worth so as to ensure that they won’t be ruined by a run of bad luck, so also a professiol risk-taking enterprise has to limit the concentration of their exposures to prevent any one event having significant impact on their capital base. So, planning for future has to take into account these stern realities.
Practically speaking, a tural tension exists between pursuit of an institution’s core competencies and competitive advantages into profitable market segments or niches that produces concentration, and their desire to diversify and exposures!
In fact: fincial sector policies and instruments are required to be constantly rebalanced to respond not only to fincial markets, prices and overall stability considerations but also to developments in real sector especially , trends in growth across sectors, regions and sections of population.
The need is there for an inorganic growth in order to compete with the techno-reinforced foreign banks on Indian soil. To generate income to meet challenges thrown - especially by the steady entry of the foreign players - alterte ways are to be tapped since it is crystal clear that tinkering around the already travelled areas cannot give rich dividends simply because of the fact that the call of the contemporary age relates to pure business and nothing else – a highly complex situation where keeping pace with demand is itself a much harder task compared to even a decade back. Talent and people development emerges to be the biggest challenge for the business world, especially for the new incumbents.
That is why; keeping in view the recent global experience on fincial crisis the urgent requirement is to examine the very adequacy of risk magement system that is being followed. Risk minimization efforts occupy the central place in such a vital context. - mechanism followed to minimize liquidity risk; use of GAP Alysis and other mechanism to measure and mage interest rate risk and the mechanisms to minimize foreign exchange risk is to be looked into, especially among others. Institutions are to assess the effectiveness of risk-conscious interl control system In fact, this are calls for assessment of the vital aspects like: effectiveness of the audit committee; effectiveness of the interl Audit Function; rectification of the deficiencies identified in the audit reports; adequacy of the controls in credit operation / controls exercised; adequacy of the controls in Treasury operations, adequacy of the controls in Branch operation; adequacy of the controls in procedures related to expenditure as well as adequacy of the control over fixed assets.
After all: the main risk which all kinds of businesses face is that of the under performance of the economy of a tion. If the economic growth slows down, then turally, the business will grow at very slow pace or may even come to a standstill. At the micro-level one will be able to emerge as a successful business leader only if one can deal with the risks in an effective manner. Big or small - good risk magement abilities are a must to take your business to the top. In this 21st century business it is all about mitigating the risk and as such the age belongs to successful risk magers who could locate, measure, control and mage the risks over a period of time.
(The writer is a noted Magement Economist, an Intertiol Commentator on Business and Economic Trends and Principal, Eminent College of Magement and Technology, can be reached at email@example.com)