Business growth: Managing risk factors

The global business environment has been turning to be more and more complicated; so also global financial markets being much more uncertain than ever before? The global financial uncertainties were not entirely unanticipated, but the intensity was not predicted nor was the duration expected and the outlook is far more uncertain now for global situation than before.
The declining situation in Euro Zone, the global  financial turmoil emanated from the U S sub prime mortgage crisis, topsy turvy oil prices, gold prices ruling at record high clearly show the need for guarding against uncertainties weighing properly the ability to absorb risk.
Keeping in view the entire goings, it is corporate governance area that invites proper attention on formulation and implementation of required plans, policies and guidelines; code of conduct of directors, chief executive and employees; mechanism to identify related parties, promoters, directors or senior management; and lending to directors, chief executive, employees and their related parties.
The need is to specifically attach importance to other related aspects as well: adequacy of the Management Information System, control in information technology and related support function; reliability of mechanism used for reporting; compliance with the prevailing statute, act, directive and regulations, especially in vital areas like profit appropriation; appropriation to exchange fluctuation reserve; distribution of dividend and of course whether prohibited activities are pursued.
And then comes the business risk management aspect. The task of locating the ever growing risks, hitherto receiving less importance comparatively, has been emerging fast. For example: the risk that a firm will go bankrupt because of lack of payment of debts is a big business risk. Competition with peer companies is also one of the major business risks faced by entrepreneurs.
Competition also causes a fall in the market share of the company due to the entry of new products. Poor management is a business risk which can be avoided by changing the board of directors.
Enterprise risk management can be learned only after gaining sufficient experience. A business risk also known as company risk can be the result of internal conditions, as well as a number of external factors that may be evident in the wider business community.
Business risk and financial risk are the two important areas that every management and finance personnel has to take into the fold. While business risk deals more with the strategic decisions of a company, it is financial risk that is related to the monetary aspects and debt.
Business risk, in turn, is more related to the decisions in the context of smooth and profitable functioning of an organisation.  Can the decision maker just ignore crucial aspects like the variability in demand for its products, variability in the input cost, operating leverage, and variability of sales price?
Financial risk exists daily - related to the structuring of the finances of an organisation, which, in turn, will vary with the nature and type of investment especially when it decides to enter into debt from financial institutions for business expansion along with equity financing.
The ever changing foreign exchange rates also add fuel to the flame to the financial risk for a company.  Specifically, financial risks in international business are much more than those involved in domestic business. A continuous tracking of international markets environment can significantly minimise this financial risk.
Side by side the ongoing business environment calls for countering concentration risk as well. Concentration may arise in a particular market, industry, region, tenor or trading strategy.
It is well known that diversification is one of the cornerstones of risk management. Just as professional gamblers limit their stakes on any one hand to a small fraction of their net worth so as to ensure that they would not be ruined by a run of bad luck, so also a professional risk-taking enterprise has to limit the concentration of their exposures to prevent any one event having significant impact on their capital base.
Practically speaking, a natural tension exists between pursuit of an institution's core competencies and competitive advantages into profitable market segments or niches that produces concentration, and their desire to diversify and exposures.
In fact financial sector policies and instruments are required to be constantly rebalanced to respond not only to financial markets, prices and overall stability considerations; but also to developments in real sector, especially trends in growth across sectors, regions and sections of population.
As for India, the need is there for an inorganic growth in order to compete with the techno-reinforced foreign banks on Indian soil.
To meet the challenges, alternate ways are to be tapped simply because the call of the contemporary age relates to pure business and a highly complex situation where keeping pace with demand is itself a much harder task compared to even a decade back.
Keeping in view the recent global experience on financial crisis the urgent requirement is to examine the very adequacy of risk management system that is being followed. Risk minimisation efforts occupy the central place in such a vital context-- mechanism followed to minimize liquidity risk; use of Gap Analysis and other mechanism to measure and manage interest rate risk and the mechanisms to minimise foreign exchange risk is specially to be looked into.
Institutions are to assess the effectiveness of risk-conscious internal control system.  In fact, this arena calls for assessment of the vital aspects like effectiveness of the audit committee and the internal audit function; rectification of the deficiencies identified in the audit reports; adequacy of the controls in credit controls exercised; adequacy of the controls in treasury operations, adequacy of the controls in branch operation; adequacy of the controls in procedures related to expenditure as well as adequacy of the control over fixed assets.  
The 21st century business is all about mitigating the risk and as such the age belongs to successful risk managers who can locate, measure, control and manage the risks over a period of time.  
After all: the main risk which all kinds of businesses face is that of the under performance of the economy of a nation. If the economic growth slows down, then naturally, the business will grow at very
slow pace or may even come to a standstill.
At the micro-level one will be able to emerge as a successful business leader only if one can deal with the risks in an effective manner. Big or small - good risk management abilities are a must to take a business to the top.
Dr B K Mukhopadhyay is a
management economist.
[email protected]