RISK TAKING IN BUSINESS

A risk is a situation where one is required to make a choice between two different
alternatives which may result into differing rewards for success or penalties for
failure.

A risk refers to the possibility of suffering harm/loss/danger.

Every business organisation contains various risk elements when doing the
business.

Business risks implies uncertainty in profits or danger of loss and the events that
could pose a risk due to some unforeseen events in future, which causes business
to fail

TYPES OF RISKS

The different types of risks are classified on the basis of levels and these levels are:
low, moderate and high level (risks), they are discussed below

LOW RISKS. These have high potential of success but are associated with low
profits. In such a situation, an entrepreneur starts a business that is common to
him and hence bearing few or low risks of failure.

MODERATE RISKS. These are ones that can be forecasted, calculated and
managed by an entrepreneur, in such a situation there are higher chances of
managing and controlling ie ensuring that in case it happens, it does not affect the
business. Examples of such risks are: fire, burglary, theft etc.

HIGH RISKS. These are risks that have a high chance of occurrence or happening,
and in case they occur, one has less or no control over them. Examples of such
risks are, smuggling, dodging government taxes, etc. however, such businesses
with high risks tend to fetch higher profits in case they succeed.

Various examples of risks that entrepreneurs encounter in business and they

include:

 Risk of losing market due to changes in customers’ tastes, demand and fashions
leading to limited customers and closure of the business.
 Break down of machinery and consequential loss which comes when one does
not service machines or if he over used the machines.
 High staff turnover or loss of key staff members especially if they have unique
skills.
 Fire outbreak due to poor electrical wiring or reluctance leaving candles
anywhere which can bring about fire outbreak.
 Increased competition due to increased number of similar businesses.

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 Loss of money in transit for example when money is being taken to the bank it
may be misplaced.
 Many people steal money from where they work like employees and other
community members (theft and burglary)
 Failure to comply with legislation, regulation and / or standards
 Bad debts created by customers who may borrow money / goods from business
and fail to pay back.
 Danger or loss of goods in transit. Goods may be damaged in the process of
loading and off-loading them.
 Corruption and embezzlement of funds by the employees for private use.
 Business failure due to changes in industrial relations, which may lead to strikes
 Outbreak of diseases affecting farm animals and crops.
 Risks of being bitten by snakes, dogs, cats and harmful insects like bees, wasps
etc
 Risks due to unfavourable government policies like ban on use of polythene
papers.
 Poor management decisions hence financial mismanagement, human resource
mismanagement and misuse of other resources

RISK ASSESSMENT

Is the process of determining whether a particular uncertain circumstance has the

potential to threaten your business operation?

Or, this involves determining the potential success (that will arise out of the risk not
happening) or potential loss (arising out of the risk happening). Risks can be
assessed based on the following factors

 Experience and abilities of management: If the persons involved in

managing the business posses the required knowledge, experience and technical
abilities, then chance of success are greater and the risk is lower.
 Availability of market: When there is assurance of high and growing market in
an area, chances of success are likely to be greater.
 Viability of the idea: Chance of success in the business are greater and the
risk is lower if the selected business idea would profitably be done in the
selected business area given the available resources.
 Flexibility of the business: If the business can easily be changed in response
to changes in consumer’s tastes and preferences without causing negative
effects, then the chances of success will be greater and risk is lower.
 Level of consistency of cash flow: This considers the ability of the business
to generate enough cash to finance the planned business expenditures. If the
business has enough cash (inflow) to finance the planned business expenditures
(cash out flow) for success of any business, the cash inflow should always be
greater than the cash out flows

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 Honesty and reliability of people involved: If the person the business deals
with such as suppliers, reliable, then chances are honest and reliable, then
chances of success will be higher and the risk is lower.
 Marketing and pricing policies: Given the prevailing competition, chances of
success will be greater and the risk lower if the prices charged and marketing
strategies used by the entrepreneur are effective and competitive.

RISK MANGEMENT

Managing of risks refer to the activity that involves controlling risks to ensure that
they do not happen and if they happen , they do not lead to severe losses to the
entrepreneur’s business. There are mainly two methods that an entrepreneur can
employ to manage business risks

MINIMIZING RISKS

In order for an entrepreneur to reduce the chances of business risks happening, he

can take preventive measures that will minimize them. Such measures include the
following

 Maintaining and up grading production technology and products to minimize the

challenge of changes in consumers taste, fashion and demand. This will help to
ensure that the products are in line with the customer’s needs
 Locating reliable sources of raw materials and keeping close contact with
suppliers to reduce the challenge of shortage of raw materials
 Maintaining adequate security, guarding and strengthening burglar proofs,
security lights etc, which will help to control the risks of theft.
 Maintaining good employee relations at work place for example by improving the
welfare facilities of workers to minimize poor industrial relations which can
result into strikes at work place
 Improving the quality of products and customer care to reduce the risk of
business being out competed. i.e the changes in the degree of competition in
the market.
 Extensive training of the entrepreneur and staff on new equipment or
procedures to reduce the risk of staff and the entrepreneur him / her self being
left behind by technological changes
 Employing experienced personnel to reduce the challenge of faulty managerial
decisions regarding the use of capital, machines, raw materials, defective inputs.

WAYS OF MAINTAINING SECURITY IN THE BUSINESS

 Checking thoroughly all vehicles, motor cycles and persons entering or
leaving the business at the entrance.
 Installing security lights and switching on them at night.
 Ensuring that all vehicles, motor cycles, persons and their properties are
registered on arrival at the main gate.
 Having in place a well maintained fence and monitoring it at all times.

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  Installing security monitoring equipment like CCTV cameras, alarm systems,
bomb detectors etc
 Employing well-armed and well trained security workers and giving them
clear instructions relating to security.
 Sensitising workers frequently on appropriate measures aimed at ensuring
security.
 Electrifying the wall fence of the business.
 Placing warning notices relating to security at different points within business
and outside the premises.
 Restricting permission to enter the business to business customers, workers
and other permitted business parties.
 Installing fire extinguishers at the business work place.
 Ensuring that all workers wear business uniforms that have name and
number tags on them at all times during working time.
 Having watch dogs to maintain security at the business premises.
 Ensuring close supervision of all workers while carrying out their duties to
minimise theft.
 Prosecuting trespassers in the business premises.
 Safely locking all business movable assets like cash, work equipment,
computers etc
 Specifying the time beyond which no visitor, unauthorized staff, vehicles and
motor cycles should be allowed in business premises.

WAYS OF ENSURING SAFETY /MINIMISING LOSS OF BUSINESS

FUNDS/CASH
 Ensuring proper documentation of all cash received and paid out.
 Banking daily cash received from sales and from other sources daily or regularly.
 Keeping the remaining cash at the business premises safely locked up in the
money safes and also locking the doors to the cash safe rooms.
 Ensuring that only authorised business workers like the accountants receive
cash receipts and recording of all cash received in the cash receipts and other
relevant books.
 Ensuring that all cash expenditures are requested for through the heads of
department and then approved by an authorized business official.
 Prohibiting any cash drawings from the business but if allowed then restricting
the amount and charging interest on the amount withdrawn.
 Ensuring timely collection of debts within one mouth or as soon as they are
incurred so as to avoid losing money due to bad debts.
 Buying business items from a nearby reliable and cheap supplier in order to
minimize high expenditure due to high transport costs.
 Obtaining the bank statement of the business on a daily basis on working days
and ensuring that the accountants reconcile these statements with the cash
book of the business.
 Employing certified auditors to check the accounts records for error and fraud

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Question:
You are involved in a business that is dealing in producing and exporting of meat
products and it has come to your notice that there is increasing loses in the
business:
(a) Develop security guidelines to be observed by all workers in your enterprise.
(b) Develop safety guidelines to be followed drivers of the enterprise vehicles.
NB: When providing guidelines, one should maintain, or use simple tense or use the
word shall.

SUPER QUALITY SNACKS

P.O. Box 78 KAMPALA
SECURITY GUIDELINES
1. All workers shall be trained on how to use fire extinguishers.
2. Every visitor shall be thoroughly checked at the entry by the company security
personnel.
3. All workers shall arrive at 8.00 a.m. and departure is at 5:p.m. every day.
4. No worker shall be allowed to carry his or her bag beyond rest room etc.
5. All workers` activities shall be assigned by the supervisor and every worker is to
report to his/her supervisor.
6. Workers shall be trained and retrained on security guidelines such as use of
protective gears.
7. All workers shall wear business uniform that have their names and work title.

SUPER QUALITY SNACKS

P.O. Box 78 KAMPALA
SAFETY GUIDELINES FOR DRIVERS
1. No company driver shall be allowed to drive company car under the influence of
alcohol.
2. No driver shall be allowed to use a company car unless authorized by the person
in charge of transport.
3. No driver shall be allowed to drive over the recommended speed limits.
4. Every driver shall be encouraged to use the seat belts whenever he/she is
driving.
5. Before the company van is on the road, it shall first be serviced.
6. All company vehicles shall always be inspected from time to time to ensure that
they are in good condition.
7. Every driver shall observe the road signs and instruction, whenever he/she is
driving.

SUPER QUALITY SNACKS

P.O. Box 622 KAMPALA
SAFETY GUIDELINES FOR BUSINESS FUNDS
 One shall ensure proper documentation of all cash received and paid out.
 Banking daily cash received from sales and from other sources shall be made
daily or regularly.
 One shall keep the remaining cash at the business premises safely locked up in
the money safes and also locking the doors to the cash safe rooms.
 Authorised business workers like the accountants shall receive cash receipts and
record all cash received in the cash receipts and other relevant books.

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 One shall ensure that all cash expenditures are requested for through the heads
of department and then approved by an authorized business official.
 There shall be prohibiting of any cash drawings from the business but if allowed
then restricting the amount and charging interest on the amount withdrawn.
 Timely collection of debts shall be ensured within one month or as soon as they
are incurred so as to avoid losing money due to bad debts.
 One shall buy business items from a nearby reliable and cheap supplier in order
to minimize high expenditure due to high transport costs.
 Obtaining the bank statement of the business on a daily basis on working days
shall be done to ensure that the accountants reconcile these statements with the
cash book of the business.
 There shall be employing of certified auditors to check the accounts records for
error and fraud.

SHIFTING OF RISKS

The entrepreneur can also manage business risks by shifting the burden of bearing
the risks to other parties such as insurance companies by obtaining suitable
insurance cover/ protection against fire, theft, accidents and other insurable risks

RISK SITUATION

A risk situation occurs when the choice is required between two or more alternative
whose potential out comes are not known and must be subjectively evaluated. It
involves potential success and potential loss. The greater ie possible loss or gain
the greater the risk involved

Risk takers make decisions in conditions of uncertainty and they balance potential
success against potential loss

Choosing a risk alternative depends on:

 How attractive the alternative is

 The extent to which the risk taker is prepared to accept the potential loss
 The relative probabilities of success and failure

Procedure for analyzing a risk situation

1. Assessing the risk: This is a situation where an entrepreneur is able to establish

whether there is a potential risk or not in choosing a particular alternative or
cause of action.
2. Determining the goals and objectives: The entrepreneur goals and objectives for
risk taking must be consistent with the business interest in terms of risk
management.
3. Surveying on various alternatives available. A survey is carried out to each
alternative thought of and details should provide for each alternatives so that
costs involved can be assessed in terms of the financial implication of the
alternative to taken

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4. Gathering information and weighing the alternatives: the information gathered is
used to assess the various alternatives in terms of future demand, Competitive
reactions and the effects of those reactions calculated.
5. Minimizing the risk. This is the step that involves realistic assessment of how
best to minimize the risks while maximizing the benefits using one or more of
the strategies such as using creativity ,entrepreneur`s ability among others.
6. Planning and implementing the best alternatives, once an alternative is selected,
a plan is made for the implementation of the alternative this include preparing a
timetable, defining clear goals and objectives and feedback plans etc so that
changes can be made where possible.

NB. Be a calculated risk taker. Remember that in business, as in life, there is no

clear way of avoiding risk taking

TYPES OF RISK TAKERS

1) LOW RISK TAKERS. These are needed at a worker level (lower level) so that
they can do the routine things and being organizational stability.
2) MODERATE RISK TAKERS. These are managers at the middle management
level. They are considered as risk takers because they need some freedom to be
innovative and make minor modification in procedures and functions.
3) HIGH RISK TAKERS. These are creative and innovative entrepreneurs,
willingness to accept change, try various alternatives and develop innovations
for products and services in new areas of business.

Term to be used
 Risk avoidance. These are measures that can help to prevent the risk from
occurring e.g a driver should not drink and drive
 Risk reduction. This is taking measures to minimize the likely loss or chances
of the risk happening e.g putting in place fire extinguishers, having a stand
by generator.
 Risk anticipation. This is forecasting the likely risk that could happen in the
business e.g putting in place burglar proofs, employing a security guard,
regular servicing of machines etc
 Risk transfer. This is when the burden of taking responsibility of a risk is
shifted to another party e.g taking an insurance policy against , fire,
accidents, theft etc

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Sample questions
Question 1
a) Explain the factors determining risk assessment.
b) What are Various examples of risks that entrepreneurs encounter in business
c) Suggest the ways through which risks can be reduced.

Question 2
a) Define the term risk.
b) Distinguish between risk transfer and risk reduction
c) Explain different types of business risks.
d) Explain the procedures followed when analyzing risk situation.

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