Share
Explore BrainMass

Types of Corporate Risks faced by businesses

Define the following corporate risk terms:

1. Organizational Risk : is faced when the company fails to segregate clearly the duties between production and development environment. It is concerned about the company's infrastructure to business operations and the protection of the assets. Organizational risks are directly related to strategic management bearing in mind that strategic mistakes may be very costly.To mitigate risks effectively, it has to be seen that the adequate controls exist and are in place, taking care of the organization's risk management needs, identifying them before they become threats to company wide assets and data.

2. Business Risk: relates to uncertainty in profits, losses, unforeseen events or the incidents that may cause the failure of the business itself. Business risk depends on the type, size and nature of the business and failure or wrong assessment of the risk by the company.Business risk may be of two types - internal and external.

Internal are the result of risk emanating from the events taking place within the organization and external are the ones over which the organization may or may not have any control and are outside the organization.

External risks may be due to political upheavals, high prices of inventories, natural causes such as tsunami, earthquake, flood or change in the government's policies.

3. Financial Risk: Involves financial mismanagement relating to the use of funds in the acquisition of the assets. If the debts incurred in financing the acquisition of assets mount so high that the company has to pay a high rate of interest without leaving any margin for surplus for profit, reinvestment or to meet the financial obligations to stakeholder/creditors. Often the firms fail to realize the bill receivables in time from the customers/dealers, or interest on bonds from Corporations and Municipalities forcing the company to borrow at a very high rate of interest to keep the business afloat, then the business is exposed to a high financial risk.

4. Operations Risk: is a risk arising out of internal activities of the people, systems and the processes through which the company operates. They may be due to frauds, legal actions, physical and environmental causes.

The Basel II definition states that operational risk is the risk of loss resulting from inadequate or failed integral processes, people and systems or from external events.

The organizations are prepared to face the losses that may arise due to the fault of their people, processes and systems failure or ineffective operations. They are prepared to suffer these losses so long the cost of rectifying the errors or improving the systems is not disproportionate to the benefit gained from these rectifications.

5. Credit Risk: is the risk arising due to the default in repayment of debts to the company's lenders or creditors. It causes loss of principal and interest resulting in the increase in the cost of collection or repayments affecting the cash flow. Companies offer fixed or floating charges on their assets against the loans.
Firms' face the risks when their customers do not make good to their invoices.

Solution Preview

Solution:

Corporate risk terms:

1. Organizational risks:

The organizational risks deal with how the company's infrastructure related to business operations and the protection of its assets have been made, that is if the company has not made clear segregation of duties between its production and development environments.

To mitigate risks effectively, it has to be seen that the adequate controls exist and are in place, taking care of the organization's risk management needs, identifying them before they become threats to company wide assets and data. Organizational risks are directly related to strategic management as strategic mistakes may prove to be very costly.

Every organization should be prudent enough to identify risk profile on the basis of cost of making mistakes vis-à-vis potential benefits of innovation.
Organizational risk may consist of various other types of risks like investment, budgetary, program management, legal liability, safety, inventory and those originating from information systems.
Management of organizational risk, however, is not an exact science. Nevertheless it assimilates collective judgment of individuals responsible for the strategic planning and day to day operations of the organization ensuring acceptable security and mitigation of risk.

2. Business Risk:

Business ...

Solution Summary

Businesses are exposed to various types of risks. Remedial measures must be initiated well in time to avoid losses, reputation in public, stakeholders, and finally public. There are some risks which may lead to closure of the business itself. The owners of the business must be on guard all the time about the direction in which the business is going, is it likely to be affected by any governmental policy, change in the market condition, views and policies of creditors, internal situation, external conditions etc.

$2.19