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Costs of Business Risks - Essay Example

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Management accounting must be able to measure costs and benefits of risk-response. It also entails strategic decision making that weighs the risk involved in all areas of business…
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Costs of Business Risks
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Costs of Business Risks

All projects in business involve risks and uncertainties. Risk identification determines what risks in the projects will affect the business. After identifying what these risks are, they are measured by means of using two types of risk analysis: qualitative risk analysis and quantitative risk assessment. According to Project Management Guide (2011), qualitative risk analysis is the relative measure based on the degree of quality or separating in categories such as high or low risk, less or more important risk, or a scale of 1-10. Quantitative risk assessment uses measurable and empirical data such as probability charts and percentages to determine associated risks.
Responding to risks and ability to control these risks must be effected in the risk management process. Risk-response planning is essential in considering the most appropriate response that produces the greatest positive net benefit that which exceeds associated costs. Risk monitoring and control can be accomplished by using effective management strategies. Based on Johnson, K. and Swanson, Z. (2007) definition, enterprise risk management (ERM) is a strategy applied throughout the company and one of the key factors that directs the business where it
Costs of Business Risk
intends to go. This strategy involves determining all activities and drivers that affect these activities through analysis. It gives the company the ability to control its risk so that it may focus on the things that are necessary in operating a business. Strategies used in market-based economies have an impact on economic growth. Globalization has flourished and is affected by the success and challenges of strategic management that are direct influence of strategists that play a role in society. Strategic management is defined as “an ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy regularly to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment.” (Lamb, 1984:ix, Strategic Management, 2011). Firms emphasize on objectives that are “competitor-oriented” and focus on profitability. Cultures that have convergence characteristics such as China and India have developed rapidly. Corporations have used outsourcing to create “cost-savings strategy.” (Juras, 2007). At the same time, relations between financial regulatory agency and companies regulated with presence of Financial Accounting Standards Board (FASB) adapted ‘non-market strategies’ that involve social and political issues. Corporations are using this strategy to have innovative advantage in the market. For instance, according to Wu, B. (2010), Novartis AG, the fourth largest pharmaceutical company in the world faced with the challenge over denial of patents for a drug that treats cancer, conducted campaigns of giving away drugs for tuberculosis, malaria, Costs of Business Risks 3 and leprosy at little to no cost. Likewise, Toyota with assistance from environmentalist earned the right for owners of Prius hybrid cars to use carpool lanes in California even for ... Read More
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