Risk is an unavoidable element of business. In fact, it will not be an exaggeration to say that business is ‘risk’. But, naturally, we are risk averse. The main reason is the possible losses arising out of the risks.

However, many risks are foreseeable and hence can be controlled or managed. Many successful business enterprises capitalize on their ability to manage risks to compete with their rivals.

So how do risks arise? Well, risks arise out of unpredictable and dynamic future. Inflation, rise in interest rates, share price devaluation, and so forth are some of the sources of risks arising out of the external environment. Likewise, risks are also caused by internal factors such as technical failure, labor strikes, defective product designs, inappropriate chain of distribution, and so forth.

How should the risks be managed? Well, it is important, first, to understand that not all risks can be managed and not all attempt to manage risks come to fruition. That said, first, possibility of happening of an event and the magnitudes of its impact have to be determined. Then appropriate measures to counter the risks need to be taken. For example, insurance is one of the best ways used by virtually every organization to minimize the foreseeable risks such as theft, damage, and accidents.

Similarly, ensuring efficient business processes, standard technology, and good relationships with employees and unions can also help reduce a good deal of uncertainties. It is, thus, good to keep track of the historical data to study the nature and extent of the possible losses and take actions accordingly.

It is not, however, as easy to deal with the risks arising out of the external factors, simply because they are highly unpredictable and beyond the control of the organization.

For example, futures, forward, options- some important techniques to reduce financial risks- are some of the sophisticated means of reducing risks employed by the organizations (for example McDonald’s) and individual investors alike. Here, the main formula is speculation and speculation itself is a risky business. Thus, a sign of warning- only those who have in-depth knowledge of the markets should use these techniques.

If the nature of risks is understood properly and right actions are taken, organizations can significantly reduce the losses arising out of risks.