Risk in Business Every Business Faces Risks, Essay

Risk in Business

Every business faces risks, and when appropriately handled, risks typically prove advantageous to businesses for both growth and profit. Risks are an ever-changing, fluid element to any businesses, so the constant evaluation and application of risk management methods is critical to the success of businesses. According to Douglas Hubbard, risk management is, "the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events." (2009). In other words, risk management is the practice of identifying risks and deciding how to handle, or whether to handle the risk at all.

There are five common types of risks that businesses face, each of which requires specialized evaluation and decision making. The first category of risk for businesses is strategic risks. Strategic risks are risks associated with operating in a specific line of businesses and the strategies that go with that particular business. For instance, the strategic risks for running a medical clinic will be very different than the strategic risks for running a dairy. The next type of risk is a compliance risk. Compliance risks are those associated with the need to comply with specific laws and regulations. For example, when running a dairy in the United States, the Food and Drug Administration has specific compliance requirements for bacterial control within the milk. The expenses associated with these compliance measures would be a risk the company must undertake.The third type of risk is financial risks. These are the risks that specifically deal with the financial structure of a business and how that financial structure should be managed. The fourth risk type is operational risks, which are the risks associated with how the business is run and the particulars of administrative procedures. The final types of risks are market risks, which are those risks that the company cannot control, but must still be prepared to handle. An example of this type of risk would be the risk of a natural disaster to an agricultural business (Trickey, 2011).

Once a risk is identified, it is passed on to the risk management specialists and management accountants. In order to handle this, management accountants utilize various tools that make the job and the risk evaluation as thorough and accurate as possible. The most basic tool used for risk evaluation is pricing models. Pricing models are especially useful when the risk is either financial or compliance related. For example, a factory may have eight years to comply with new water filtering laws. A management accountant could do the research and determine the cost the supplies for the filtration currently on the market and use those figures to determine whether it would be more expensive to wait until the end of the eight-year period or purchase the equipment and comply early. Another tool used for risk….....