Long ago people viewed “risk” as the inevitability of chance which occurred beyond the control of humans. In today’s world the concept of “risk” has turned into riches, as risky ventures have become the norm in the business world. “Risk” therefore applies to decisions that can have a bad or good outcome. The different types of “risk” can include financial, legal, ethical, information technology, or even human resource since it can exist everywhere and at any time in our lives. When we eat, we encounter the risk of food poisoning, to cross the road we run the risk of being hit by a passing motor car or even when we drive, we can increase the risk of an accident. If no risk is done then, no breakthrough can be expected. Whether it is in your career, financially, or in your business. Once you fail to take a risk then you will suffer the consequences of making significant gains, which means that you run the risk of a possible loss.
What is Risk?
According to Mortimer (2005 p. 45) “risk” is any uncertainty about a future event which might threaten an organization’s ability to accomplish its mission. Which means that it can be the chance of something happening that will have a negative impact on an organization. It is the possibility of suffering a loss that is loss of quality income, loss of profit, loss of success or even loss of life. It means therefore that change involves “risk”, but once the set program has been attained or has achieved total success “risk” vanishes. It is therefore of great importance that the management of risk be well managed. “Risk management” was engineered into dealing with the possibility that some future event might cause harm. It includes strategies and techniques for recognizing and confronting treats of risk and provided an environment for proactive decision making for the proactive decision making, for the purpose of: * “What can go wrong”
* “What will we do”
* “How will or can it be resolved”.
Success in business to a certain degree requires owners or managers to take “risk”. Most successful businesses are managed by people who know when or how to push forward and when or how to hold back, when to sell and when to stand firm. According to Yusof (2007) p.1. “Risk is an undeniable reality of doing business today, whether globally or locally. Although failure is in a way linked to “risk”, the successful business person should not fear “risk” but strives to understand it, to manage it, or even try to take advantage of it. In that way the business person would be able to calculate the risk before taking it. Unfortunately the world of business now is exposed to more risk, such as high interest rate, inflation, recession, high exchange rates, even political and cultural risk to name a few. Therefore it takes a great deal of expertise to effectively manage risk in business. Financial Risk
Financial Risk is associated with the use of debt financing by firms or companies, since the presence of debt involves legal and mandatory obligations to make specified payments at specified time period. There is a risk that the earnings of the firm may not be sufficient to meet these obligations towards the creditors. In case of the shareholders, the financial risks occur because it is not only the mandatory nature of debt obligations but also the property of ‘prior payments’ of these obligations. In short, the use of debt by the firm causes variability of return for both creditors and shareholders. Financial risk is usually measured by the debt/equity ratio of the firm: the higher the ratio, the greater the variability of the return and the higher the financial risk. Financial risk also involves liquidity risk, maturity risk, interest rate risk and inflation risk. Liquidity refers to situations wherein it may not be possible to dispose or sell the assets or it maybe possible to sell only at great inconvenience of cost in terms of money and time. The...