Business in 2019: Glimmer of Hope amidst Risk-based Complexities

Dr BK Mukhopadhyay

(A noted management economist and an international commentator on business and economic affairs.

He may be reached at m.bibhas@gmail.com)

Let us have a quick look at what the memorable risk analysts say: “Risk is the chance of loss. It is the possibility of some un-favourable occurrence.” -B.O.Wheeler. Again C O Hardy nicely opined: “Risk may be defined as uncertainty in regard to cost, loss, or damage.”

Actually, if we glance back, it can be located that in ancient times, business risks were less and limited. But in the present-day-times-characterized by intense competition, advanced technology and globalization of the economy; business risks are quite severe. Further, in times to come, business risks are likely to increase in intensity.

Facing the Reality

The global business environment today has become more complicated – so also global financial markets - much more uncertain than ever before. The global financial uncertainties were not entirely unanticipated, 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 financial turmoil emanated from the US sub-prime mortgage crisis; topsy-turvy oil prices; gold prices ruling at record high – a few instances out of a good against uncertainties weighing properly the ability to absorb risk!

Ever-Growing Risks

And then, the business risk management 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 management is a business risk which can be avoided by changing the board of directors. Enterprise risk management can be learned only after gaining sufficient experience.

The very arena 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 internal conditions, as well as a number of external factors [beyond the control of the company to set right] that may be evident in the wider business community.

Business risk and financial risk are the two important areas that every management and finance personnel has to take into the fold. While business risk deals more with the strategic decisions of a company, it is financial 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.

Financial risk is existing daily - related to the structuring of the finances of an organization, which, in turn, will vary with the nature and type of investment especially when an organization decides to enter into debt from financial institutions for business expansion along with equity financing [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 financial risk for a company. Specifically, financial risks in international business are much more than those involved in domestic business. A continuous tracking of international markets environment can significantly minimise this financial risk.

Practically speaking, a natural 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!

Close Regular Supervision a Must

In fact: financial sector policies and instruments are required to be constantly rebalanced to respond not only to financial markets, prices and overall stability considerations but also to developments in real sector especially , trends in growth across sectors, regions and sections of population.

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 financial crisis the urgent requirement is to examine the very adequacy of risk management 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 Analysis and other mechanism to measure and manage 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 internal control system

In fact, this arena calls for assessment of the vital aspects like: effectiveness of the audit committee; effectiveness of the internal 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.

The upshot: business risks are, by and large, unavoidable though the possibility of the un-favourable consequences associated with business risks could be minimized in as much as if the management of the business enterprise is able to successfully handle and manage business risks; there remain opportunities for gains to the business enterprise.

Though it is difficult, if not Impossible, to forecast the possibility of loss, yet it is better to assume realistically that in times to come, business risks are likely to increase in intensity. That is why the nature of risks must be properly interpreted considering the major points: time: size of the enterprise [as small businesses are less exposed to business risks as they enjoy flexibility of operations and can easily adapt themselves to changing circumstances, while on the other hand, the bigger is the size of business; the lesser is the flexibility possessed by it. Hence bigger businesses are more exposed to business risks]. Apart from these business Risks depends on nature of business / terms of sales [enterprises conducting sales only on cash basis, business risks are nil; while enterprises conducting large scale credit sales are more exposed to the risk of bad debts]; degree of competition and of course on competence of management as well as on the age of the business enterprise:[old business enterprises are less exposed to business risks, mainly because of the experience of successfully handling business risks, in the past, whereas new concerns are more exposed to business risks, because of the lack of experience].

As business is continuous and spontaneous in nature, risk assessment has to go on non-stop so that probability of incurring loss is minimized [it cannot be zero]