Chapter 2: Risk Management

• What is a risk?

  A circumstance or factor that has a negative affect on the operation or profitability of a business.
• What is an internal risk?

  A threat within the business that can be controlled

  • Public relations failures
  • Employee error
  • Product failure
  • Failure of equipment
• What is an external risk?

  A threat that a business has little to no control over.

  • Natural disaster
  • Supply chain problem
  • Economic factors
  • Legal challenges
• Financial risk


  The likelihood of losing money on a business or investment decision.

  E.g cash flow problems due to money needed to be spent on raw materials
• Operational risk


  The breakdown of key equipment or machinery
• Strategic risk 


  A new competitor coming on to the market
• Compliance risk 


  Responding to the introduction of new health and safety legislation
• What is a contingency plan ?


  Backup plan used in case of an emergency or crisis. It is used to restore the business's day to day function as much as possible.
• Reasons for contingency plan

  • Businesses face many risks
  • Saves the business time and money in the long run
  • It prepares the business for any event that may occur
• Reasons against contingency plan


  • Expensive and time consuming
  • Unexpected events can still occur as it is impossible to plan for every event
• What is a quantifiable risk?

  Risks that cab expressed in monetary value. They can be measured such as potential loss of overseas sales. Example include

  • Financial risk
  • Operational risk
  • Strategic risk
  • Compliance risk
• What is un-quantifiable risk?


  Risks that can't be measured such as the adverse effects on a company's image if a product is not successful.
• What is risk management?

  The process of identifying, monitoring and managing potential risks in order to minimize the negative impact they may have on an organization.
• Examples of preventative actions

  Methods to avoid risks include:

  • train staff appropriately
  • regular back up of IT systems
  • Put robust quality control systems in place
• Production risk 


  Machinery breaking down, therefore there is a loss of production and a failure to deliver products on time.
• Human resource risk 


  Example: industrial actions taken by employees (strikes) which causes production to come to a halt and sales may suffer
• Environmental risks


  The business operation may damage the environment which could lead to pressure groups to take actions such as boycott the operation.
• Product risk


  A faulty or dangerous product could lead to a total result of a batch of the products
• Legal risk


  Example: a product broke the law because it didn't meet the minimum safety standards and would have to be withdrawn and new research and development carried out.