Classification of Individual Business Risk

Individual business risk can be low or high impact and low or high likelihood. Here are some illustrations for a satirical magazine.

What can management do about risks once they are identified? Obviously what to do based on the risk and there are an infinite variety of risks. One possible categorization of potential reactions by management is as follows:

• Do nothing and hope for the best
• Develop internal controls
• Develop quality controls over production of goods, production of services, staff recruitment
• Join in government schemes like Famine Relief or Poverty Reduction
• Train staff
• Diversify – acquisition, new products, multiple sourcing, adding to customer base perhaps by exporting
• Risk reduction–raising staff awareness of risk, tighter discipline in all areas, physical measures such as sprinklers.  Diversified computer systems instead of one complex one
• Transfer of risk – by insurance, sub-contracting, outsourcing
• Avoidance – e.g. leaving a market such as the USA to avoid product liability

In the end, the business of the entrepreneur is risk raking and all risk cannot be removed. The fundamental economic truism is that there is a correlation among risk and return and high returns are not possible with any risk.