ENTREPRENEURIAL RISK AND RISK MANAGEMENT
There exists a plethora of definitions for risk in literature, but one common thing among all the
definitions is “uncertainty”
Therefore, we can refer to risk as a situation where there is uncertainty about what will be the
outcome.
Uncertainty here can result from unpredictability or imperfect knowledge concerning the future.
An entrepreneur is said to be a risk-taker because of his ability to withstand the fear of
uncertainty and potential failure. Entrepreneurs operate in an environment where they are in
constant competition with others for market and valuable resources, making them to give in the
best, be willing to bear moderate risks in order to have higher returns on capital invested.
Kinds of Entrepreneurial Risks
1. Economic risks – occurs in situations where outcomes cannot be predicted with high
degree of accuracy, rather possibilities and probabilities of occurrence are known from
changes in overall business conditions. These changes include; competition, dynamic
consumer’s lifestyle, demographic changes, inflation, government regulations.
2. Natural Risks – occurs when Natural occurrences leads to risk. For example, drought,
flood, fire and earthquakes. Natural risk can cause a good enterprise to go bad and vice
versa.
3. Human risks – these are risks arising from the unpredictable nature of employees and
customers. Four principal causes of human risk are;
a) Dishonesty of employee and customers
b) Carelessness of employee
c) Incompetence of employee
d) Employee accident or sickness
4. Financial Risks – Entrepreneurs invest their capital with hope of three possible
outcomes: gain, break-even, or loss. Sources of capital include personal savings, bank
loans, government agencies, family and friends.
Financial Risk - arises from all these factors when you invest the capital in an uncertainty.
Some entrepreneurs lack relevant knowledge to manage their financial sources and they
may end up choosing an unsuitable source of financing. This may lead to colossal lose.
5. Mental Risks - this result from when the entrepreneur has reached the threshold and is
exhausted such that he is not mentally sound enough to pilot the day-to-day running of
the enterprise. Mental risk if not properly managed can lead to business failure or low
productivity.
RISK MANAGEMENT
There are four ways of managing business risk:
a) Risk prevention and reduction
b) Risk transfer
c) Risk retention
d) Risk avoidance
Risk Prevention & Reduction
Some risks can be prevented, while some can not be eliminated completely, but the rate of its
occurrence can be reduced drastically. Some ways to prevent or reduce risk include;
a. Providing safe condition and safety instructions
b. Screening and training employees
c. Preventing robberies.
d. Controlling employee theft.
Risk Transfer
By transferring the risk to another business or to another party, some business risks can be
reduced, controlled or eliminated. The three common ways of transferring risks are;
a. Through insurance
b. Through guarantee and warranties
c. Through business ownership
Risk Retention
In some cases, its is impossible for businesses to prevent or transfer risks, they retain the risk or
assume responsibilities for it.
For instance, if customer trend changes and merchandise remain unsold, the business has to bear
the loss, i.e., they retain the risk.
Businesses and entrepreneurs retain certain risks because;
a. They are unaware of the risk. E.g., employee theft
b. They underestimate the risk. E.g., when merchandise is purchased in anticipation of high
sales, but could not be achieved because adverse situations.
c. They over anticipated a profit. E.g., purchasing a land for development and future profit
on sale which they could not achieve.
Risk Avoidance
Certain risks can be avoided by anticipating them in advance. For example, market research can
lead an entrepreneur to conclude that investing in a product or a service at a point in time does
not worth the risk. Hence, risk of failure is avoided.
Generally, risk-taking a quality of entrepreneurs, successful entrepreneurs engage in moderate or
calculated risks. Most entrepreneurs work hard through planning and preparation to avoid or
minimize the risk involved in business in order to better control the fate of their vision.
