The activities of any entrepreneur are always associated with commercial risk. This is due to the fact that almost all managerial decisions are always made by the subject in conditions of uncertainty - from several options, he must choose only one that is economically advantageous for him.
Risk is one of the inevitable and extremely important components of any entrepreneurial activity. It is carried out under the influence of many factors and is aimed at achieving specific goals, which requires a certain activity from the subject in decision-making. Let us further consider the features of commercial risks of the enterprise.
General information
Commercial risk is the likelihood of adverse conditions or the achievement of an unsuccessful result of an activity.
Striving for maximum efficiency in his work, the entrepreneur is constantly faced with the risk of not only not making the profit that he expects, but also of losing everything that he has. This situation may be due to different circumstances. Among them are the unfavorable climate in the region, the actions of competitors, and the adoption of unsuccessful management decisions by the subject himself. In order to avoid negative phenomena in entrepreneurial activity, an assessment of commercial risk is carried out. It helps prevent or minimize negative consequences. If the actions of the subject are inevitably associated with commercial risk, then it is necessary to learn to take risks reasonably.
Influence factors
To maintain stability in the activities of the enterprise, the entrepreneur needs to timely identify and analyze circumstances that may affect the degree of risk. All possible factors of influence are divided into internal and external. This classification is due to the fact that commercial risk has a subjective and objective side.
External factors
They are considered such circumstances and conditions that do not depend on the will of the entrepreneur, but should be taken into account, since they affect the state of affairs.
The main external factors determining the degree of commercial risk are:
- Normative acts regulating entrepreneurial activity.
- Unexpected actions of public services and institutions.
- Changes in the tax system.
- Corruption.
- Interaction with counterparties.
- The actions of competitors.
The list includes direct factors, i.e., those that directly affect the results of entrepreneurial activity. In addition to them, a group of indirect circumstances is distinguished. It includes:
- Political conditions prevailing in the territory.
- The economic situation in the country.
- Features of the market.
- Events in the international arena.
- Force majeure (unforeseen) circumstances.
Intrinsic factors
Their occurrence is determined by the actions of the entrepreneur. The main internal factors affecting the level of commercial risk are:
- Enterprise strategy. Risks may arise due to an erroneous choice of goals, an incorrect forecast for market development, an incorrect assessment of the company's potential, etc.
- Company management. The likelihood of not achieving the expected results increases with the low quality of labor, financial, material resources management, associated with a lack of experience, inconsistent actions, financial miscalculations, and an inefficient system of labor organization in the enterprise.
- The amount of financial resources. Risks in commercial activities may be associated with difficulties in obtaining loans, loans, high interest rates, and the lack of necessary reserves.
- Organization of sales transactions. Risks often arise when counterparties do not comply with the terms of the transaction, the irrational choice of suppliers, and insufficient attention to service policies.
In addition, negative consequences can occur with:
- Loss of goods due to careless attitude of staff to their work.
- Unfair attitude of employees to their duties (abuse of authority or negligence).
- The low level of qualifications of managers, which can lead to the conclusion of risky transactions.
- Suspension of the enterprise due to violation of the law.
Other factor classifications
Depending on the degree of influence on the size of the risk, factors are distinguished:
- The main ones. Their impact leads to significant changes in the degree of risk.
- Additional (auxiliary). These factors have little effect on the degree of risk.
The above classification is very arbitrary. The fact is that the assignment of any factors to one or another group will depend on the type of commercial risk. So, for example, if the probability of spoilage is analyzed, the main factors will be:
- storage conditions;
- compliance with safety rules;
- presence of security alarm.
At the same time, these same factors become auxiliary in the study of inflationary or currency risks of a commercial organization.
Influence factors are also divided depending on the degree of controllability into:
- Managed.
- Uncontrollable.
- Difficult to adjust.
Among the first are factors that depend on the quality of the company’s work, that is, on the effectiveness of the labor organization system, management effectiveness, rationality and reasonableness of the use of resources. They are called managed because they can be changed.
Uncontrollable factors cannot be corrected, so they can only be taken into account. These include the exchange rate, political conditions, climate, etc.
Factors that depend on the background of the company are considered difficult to regulate and it is difficult to influence them at the moment. These include qualifications and number of employees, team interactions, premises occupied by the enterprise.
In any organization - in a trading, manufacturing company, in a bank, commercial risk arises due to the uncertainty of the influence of all the above factors. Its presence is the flip side of economic independence and freedom, in some way payment for them. The fact is that a certain autonomy is granted to all entrepreneurs. Moreover, the freedom of one businessman exists simultaneously with the freedoms of other businessmen and consumers. Accordingly, during the development of market relations, the degree of uncertainty increases.
Commercial Risk Assessment
In the economic literature, the concepts of “risk” and “uncertainty” are often regarded as identical categories. Meanwhile, they have differences. The fact is that risk characterizes a situation in which the onset of any unknown events is very likely, and this can be quantified. As for uncertainty, this concept is more capacious and broader, because it is determined by all factors that can affect the final result of entrepreneurial activity. It is different in that the possibility of any unknown events cannot be estimated in advance. Measuring uncertainty is almost impossible. But an analysis of commercial risk is possible. To measure it, losses and the probability of not receiving the expected result are taken into account.
Possible losses
In a business, there may be the following risk consequences:
- Material. The company may lose construction, raw materials, materials.
- Financial. The company may experience unexpected fines.
- Labor. If the company’s personnel work is not well organized, downtime, the departure of qualified specialists, etc. are possible.
Mistakes in managerial activities can cause damage to the health and life of citizens, harm to nature, etc.
Methods for determining the level of risk
The degree of probability of failure to achieve the planned results is determined by:
- The statistical method. It is based on the techniques of mathematical statistics, as well as indicators of financial and economic activities of the company.
- Expert method. When using it, various factors are taken into account, the probability of occurrence of certain losses is predicted.
Risk classification
In the course of business, an enterprise faces various types of risks. There is a generally accepted classification, according to which there are:
- Inevitable risks. They can be taken into account in advance and transferred to the insurance company by concluding an appropriate contract. Risks from theft, accidents, transportation of products, natural disasters, non-fulfillment of contractual terms by contractors, illnesses of employees, negligence, dishonesty of employees are considered inevitable.
- Risks due to inevitable uncertainty. We are talking about losses due to unpredictable changes in the demand index, the situation in securities, fashion, scientific and technological achievements, etc.
Meanwhile, this is not the only classification used by enterprises. Depending on the occurrence factor, the risks can be divided into:
- Natural and climatic. They are caused by floods, storms, earthquakes, etc.
- Political. These risks are associated with the specifics of the political situation in the state and the activities of the authorities.
Another large group is economic risks. These include:
- The probability of accidental loss of goods or other property due to an accident, theft, fire, failure to comply with storage rules, sabotage, etc. As practice shows, these reasons lead to significant losses, which indicates the high importance of this type of risk in the general list.
- The likelihood of counterparties not fulfilling their contractual obligations. It is determined by the dishonesty of partners, their insolvency. Currently, almost all companies face this risk.
- Economic risk. It occurs in violation of the normal course of business of the company, failure to achieve the planned result (for example, the expected volume of production). This risk can be caused by changes in the market, economic miscalculations. It is considered one of the most common in the work of the enterprise.
- Price risk. This species is recognized by experts as one of the most dangerous. The fact is that it has a direct and significant influence on the degree of probability of loss of profit of the enterprise. This risk is expressed in higher selling and wholesale prices, tariffs for services of other enterprises (for example, energy carriers), and equipment costs.
- Marketing risk. It is determined by choosing the wrong strategy for the company’s market behavior. Losses may occur due to improper customer orientation, errors in assortment selection, competitor assessment, etc.
- Transport risk. During the transportation of products there is always the possibility of its loss, damage, etc.
Cash loss
Financial risks for a commercial company are often the most dangerous. Some of them can be prevented, and some not. Among the main ones are:
- Currency risk. Commercial banks, as well as subjects of foreign economic activity, are most often faced with this type of risk. It assumes the probability of loss due to a change in course. When importing goods, the company will lose when the foreign exchange rate in relation to the national one increases. With its reduction, in turn, losses may occur during export.
- Inflationary risk. It represents the likelihood that cash generated by rising inflation will depreciate faster than increase in value. The real price of the company's capital will also be depreciated.
- Investment risk. It involves the occurrence of unforeseen losses during the investment of capital in other enterprises, the re-equipment or expansion of own production, the acquisition of securities.
- Insolvency risk. Some experts call it credit risk. A commercial company may become unable to pay its obligations for various reasons. For example, with incorrect planning of the timing and size of revenue and expenditure. Loss of solvency can lead to bankruptcy proceedings, therefore, it is very dangerous for the enterprise.
Business risk management
As mentioned above, the likelihood of certain losses in the activities of the enterprise is inevitable. In this regard, the company should develop a specific policy to minimize or neutralize the dangers and reduce their negative consequences. Today, a variety of risk management methods are used. For a commercial bank, for example, a policy of accepting or reducing risk is more suitable. The methods of avoiding probable losses are hardly applicable for such an organization, since it has to make risky transactions in order to receive income.
Risk aversion
This option involves the refusal of the company to perform any operations. In this case, the company may not get the expected results, but can completely avoid losses.
Managers can make a decision about risk aversion both at the stage of discussion of the transaction and later. As a rule, it is taken at the preliminary stage. It should be noted that risk aversion can only be used if there are a number of conditions:
- If the application of this method of minimizing losses does not entail other risks.
- If the degree of risk is higher than the probable income from the transaction.
- If the company cannot compensate for its losses in the event of a risky transaction.
Meanwhile, far from all the dangers the company can evade. Often, the company consciously takes risks.
Loss Reduction Techniques
The main areas of risk minimization policy include:
- Loss avoidance.
- Acceptance of the likelihood of negative consequences.
- Risk reduction.
In the first case, measures are developed to completely eliminate a certain type of risk. As a rule, this is achieved through the abandonment of certain business operations that are most dangerous for the enterprise. Such a policy is considered the simplest, but it is not always effective. The fact is that if risks are avoided, the company loses the opportunity to earn income.
Acceptance of the probability of losses implies the possibility and desire to cover losses at the expense of one's own funds. It is advisable to apply this policy to financially stable companies wishing to expand production. It should be borne in mind that such an approach can lead to unjustified and large losses.
Risk reduction is a decrease in the probability and size of losses. The most serious dangers can be neutralized through insurance. When using this method, the company must clearly identify all types of risks from which it will protect itself. In addition, you should pay special attention to the choice of insurance company. It must have a license, the necessary amount of equity and authorized capital, an adequate amount of tariffs, etc.
Risk reduction can be carried out by internal insurance. It is held within the commercial organization itself. For this purpose, special funds are being formed at the enterprise, the funds of which will be spent on compensation for losses. The list of such reserves and the amount of deductions are fixed in the charter of the company.