While risks in production of goods are encountered in such factors as attaining of the raw materials and production of goods, the risks in the service provision industry arise from factors such as the nature of the service and the effects it has on the community that forms its consumer base. Therefore, the non-financial companies face risks that take very many different forms as compared to the financial companies. Risk management then deserves a more detailed approach.
Non-financial companies define risks in terms of the uncertainty raised by different factors of great concern to a company that wishes to start a new project are factors like the political environment, the physical environment, the operational risks, the financial risks, the enterprise risks and the market conduct. When setting up a new project, a company would want to consider the political environment in the area where this project is to be initiated. Countries that suffer from political instability have been known to be least favorable for a new project unless the project has a relation to the instability in the country. Another angle that is critical to look into would be the political good-will that the countrys or regional leadership has towards the kind of business this particular company is dealing with. It is a well known fact that most Islamic nations do not allow alcohol producing companies into their countries as their religion and faith does not compromise on drinking. The second environment is the physical environment that might not be good for the new project. For instance, locating a fish processing company in extremely hot areas would need that a company invests heavily in refrigeration equipment that might be very expensive and thus create expensive overheads. Environmental degradation leads to poor production of such resources as crops used as raw materials and this can endanger the livelihood of companies that deal with crop-processing to produce their goods. The remaining factors are also looked at but basically on condition that a risk analysis is first carried out. This is due to the fact that their magnitude can never be judged and is relative in different areas.
Analysis will reveal operational risks. These are the risks that arise due to the day-to-day activities in the company once the project has been set up. The operational risks arise from the activities that are not related to the finances of the company. Events that could lead to losses are named here. They range from lawsuits that arise from the activities in the company to issues involving employee conduct and so on. The company may at one point need to use finances in cases that arise due to such things as employee misconduct (misuse of position or abuse of power) and lawsuits by paying fines and so on. Fines are known to affect company-capital as they are usually high. Financial risks are the most sensitive as finances take center-stage in the running of the company. Credit risks, interest-rate risks and capital exposure risks are the main financial risks a company faces in setting up a new project. Credit risks are the risks that lending from financial institutions poses to the new project. The company should only borrow to set up a new project when the management is sure that they can repay the credit within the stipulated period and still go ahead and attain reasonable profits from it. A situation where a company incurs losses as a result of failure to pay back credits is certain to lead it to a state of insolvency. Interest-rate risks are more likely to occur if this project is invested in without carrying out a sound risk analysis. The capital that is fronted for the project overhead and operational costs should in the least be lower than the gross profits that accrue from the venture. This is a good measure of how successful the new project would be. The capital exposure is a financial risk that the company may come to expose itself when it carries out activities to popularize its new venture. An example is in advertising and services that come along with the sale of goods such as after-sale services. They might overshoot the afore-planned amount and expose the main capital for the venture as the management might be tempted to use it to cover for their costs. Other risks that can be looked at are such as the market conduct and enterprise risks which mainly focus on how the company manages its activities after the establishment of the project. An extravagant campaign to popularize products has risks aligned to failure of the whole campaign. Therefore, in such enterprise and market activities as advertising, the use of so many resources in marketing could plunge the company to losses.
The measure of risks is done in relation to the financial costs the company incurs in running a new project. The measure of risks is also done when a risk analysis is carried out. A risk analysis exposes the financial expenditure a company is likely to incur in case it decides to go through with the plan to start a new project. Brachinger (2010) opines that the standard deviation calculated from random variables with monetary value provide a basis for measurement of risks. As such, it indicates whether the investments return is due to an investment that was done with all the risks in consideration or with little regard to the danger they posed to the company. The value of all the outcomes should be calculated to come up with a probability that indicates lesser risk for the company to involve in a new project. For instance, the expected value which is a weighted average of all the probable outcomes should be calculated. It sums up the products of all the generated project returns and their respective outcomes.
The costs of uncertainty also can act as a measure of risks. This can be a good way of judging the range within which the capital that is to be used in realizing meaningful profit from the project. By looking at all the risks and the costs they are likely to bring along, the management can surely judge an amount that can be allocated to the project. If this amount is very high, it is advisable that the project be shelved for another time when the companys finances will be able to support such ventures. The expected loss ratio shows the amount of loss likely to be encountered should the venture fail. It is calculated from the ratio of the expected loss to the sum of the expected gain and expected loss. If the ratio has a small value, the implication is that a minimal loss is likely to be encountered while if it is high the loss is also bound to be high. This is a measure as suggested by Savvides (1994).
Tang (2010) says that a risk can also be measured by taking into account the various risk factors that the business is exposed to. The factors are such as the financial, business, liquidity and the foreign exchange value risks. The financial standing of a company could be a good measure of the risk it is exposing itself to. Should the management of a company want to involve in the expansion by starting a new project, the capital base should be a factor that is considered at first. This is critical as new projects require a good amount of capital to put up basing on costs that are likely to be incurred in running it. Therefore, if the company has a big current ratio, then the likelihood of succeeding in establishing a new project would be very little due to its inability to pay debts that should be settled within a short time-frame. Business risks involve the activities that a company undertakes in its operations. Such should not be a liability in the form of excess expenditure so as to end up crippling its goal to establish a new venture or project. The liquidity of a company is crucial. For instance, blue chip companies usually have shares that are of a very high value above the normal shares. The likelihood of a blue-chip company succeeding in establishing a new project is high due to its ability to raise capital with ease from the sale of their stock. This would be a sure security to a big company. Small companies, on the other hand might, suffer lower prices than anticipated should they decide to off-load their stock in the verge of trying to come up with finances to start a new project. Foreign exchange poses a bigger risk to companies operating in overseas countries. When the currencies of such countries dip in value, the government is likely to take measures to protect their companies. This would be dangerous to a company in case it wants to start a new project in that the skepticism by which the community it should draw its customers would affect business.
Risk management endeavors to ensure that the effects of risks are reduced to a minimal range so that the company can realize tangible profits from its venture in new projects. The management of these risks, if at all a company decides to go ahead and establish its new project, would be the best option as this would ensure continuity. Several ways of managing risks have been suggested. Product diversification is one method. The company would need to go into providing different products so that the probability of all the products being affected at a go is reduced considerably. Volatile markets should be dealt with through establishing advantage by regulating fixed and variable costs so that they do not affect the capital set up for such projects. Volume of production should also be regulated to within the demand constraints to maximize on capital availability. Garza (2009) suggests the use of derivatives as a measure to manage risks. The uncertainty involved in the use of derivatives is very high but likely to pay in case of a good turnout.
In conclusion, risks are present in every business. The establishment of new projects should not be stopped due to the threats that the risks pose. In essence, good timing is the key to success in new projects. It is therefore prudent that we consider wise measures to use while dealing with the challenges that arise due to the effects of these risks. It is only a business that does thorough risk analysis that succeeds in reducing them to least harmful levels. Risk management techniques such as retention, transfer and reduction are to be employed in case a company management wishes to succeed in averting effects of risks as suggested by Nicholson (1999). In coming up with capital to finance projects, companies that operate in many countries should check the stock prices in each country as stock prices in the global markets perform differently and as such the different market temperaments pose a big threat. The importance of risk analysis cannot be ignored as it enhances decision making as well as floats new ideas on how to sustain the new project. It also highlights the range of areas that need the most help and are considered critical for its success so that the project does not collapse. Apart from assigning a risk assessment officer, all the employees who are responsible for the success of the new project should be on the lookout for factors that expose the project to both short-term and long term risks.
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