UNIVERSITY INSTITUTE OF LEGAL STUDIES

IVTH SEMESTER BCOMLLB(Hons.) PROJECT REPORT

ON
“RISK- TYPES AND STEPS INVOLVED IN RISK
MANAGEMENT PROCESS”
FOR THE SUBJECT OF ENTREPRENEURSHIP AND SMALL-
SCALE BUSINESS
2020-21
SUBMITTED TO:
DR. HARVINDER SINGH
U.I.L.S
PANJAB UNIVERSITY
SUBMITTED BY:
NIRUPAM KAUR
ROLL NO- 292/19
BCOM LLB (Hons.)
SECTION– E
SEMESTER 4

1 | University Institute of Legal Studies.

 ACKNOWLEGDEMENT

I would like to express my warm gratitude towards almighty who

provided me such a fortunate opportunity to study this respective
course in UILS, PU. I thank my professor Dr. Harvinder Singh sir,
who guided me in making this project.
Secondly, I would thank my parents who provided me with the
resources required to complete this project. I will also thank my
sibling and friends who helped me in completing the said project on
time.

NIRUPAM KAUR

2 | University Institute of Legal Studies.

 TABLE OF CONTENTS

ACKNOWLEGDEMENT ........................................................ 2

INTRODUCTION ...............................................................................4

CAUSES OF ENTREPRENEURIAL RISK .....................................5

TYPES OF ENTREPRENEURIAL RISK ........................................6

RISK MANAGEMENT OR CONTROL OF RISKS ......................8

STEPS IN RISK MANAGEMENT ...................................................9

RISK HANDLING TECHNIQUES ................................................10

CONCLUSION ..................................................................................12

REFERENCES ..................................................................................13

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 INTRODUCTION
Risk means uncertainty of losses, it refers to possibility of meeting danger,
suffering loss or injury. Risk is the chance or probability of a loss. Risk is
defined in financial terms as the chance that an outcome or investment's actual
gains will differ from an expected outcome or return. Risk includes the
possibility of losing some or all of an original investment.
Business risk is the exposure, a company or organization has to face, that will
lower its profits or lead it to fail. Anything that threatens a company's ability to
achieve its financial goals is considered a business risk. There are many factors
that can converge to create business risk. Sometimes it is a company's top
leadership or management that creates situations where a business may be
exposed to a greater degree of risk.
“Risk may be defined as combination of hazards measured by probability”
Irving Fisher
‘Uncertain future events which could influence the achievement of the
organisation’s strategic, operational and financial objectives.’
International Federation of Accountants,1999
There is no specified criteria to decide whether any risk is insurable or not. The
concept of insurable risks refers to only those uncertainties which are related to
economic matters. Non-economic risk such as risk to reputation and respect of
entrepreneur are personal to him and non-insurable in nature. An entrepreneur’s
personality, lifestyle, and age are some of the top factors to consider for
individual risk management. Each entrepreneur has a unique risk profile that
determines their willingness and ability to withstand risk. In general, as business
risks rise, entrepreneurs expect higher returns to compensate for taking those
risks.
Risk is of paramount importance to organisations. Businesses must identify,
evaluate, manage and report many types of risk for improved external decision
making. it is possible and prudent to manage investing risks involved in an
entrepreneur by understanding the basics of risk and how it is measured.
Learning the risks that can apply to different scenarios and some of the ways to
manage them holistically will help all types of entrepreneurs as well as investors
to avoid unnecessary and costly losses.

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Running a business comes with many types of risk. Some of these potential
hazards can destroy a business, while others can cause serious damage that is
costly and time-consuming to repair. Despite the risks implicit in doing
business, CEOs and risk management officers can anticipate and prepare,
regardless of the size of their business. If and when a risk becomes a reality, a
well-prepared business can minimize the impact on earnings, lost time and
productivity, and negative impact on customers. For start-ups and established
businesses, the ability to identify risks is a key part of strategic business
planning.1

CAUSES OF ENTREPRENEURIAL RISK

The major causes of risk in a business enterprise are explained below:
1. Market Competition: This refers to the competition from the existing
competitors in the market. It is one of the major causes of business risk.
Business needs to keep an eye on the activities of its competitors from time
to time. Business needs to keep to compete in terms of price and quality
from its competitors. Prices of the product should be kept according to the
market demand. Business should focus on efficiency to cut down its prices &
provide better quality.

2. Natural Factors: These are natural factors which affect business

performance. Natural calamities like flood, drought, earthquake, cyclone etc.
are such factors. These are not under the control of the human. These are all
unavoidable & bring large destruction to the economy. Large loss of profit,
life & property is brought by these factors. These losses can be minimized by
taking various insurance covers.

3. Government Regulation: It refers to rules and regulations to be followed by

the business. Government changes these rules from time to time. Sometimes
these rules are too strict for the business to be followed. Small businesses
largely suffer due to these government rules. These rules & regulations bring
large losses for the business when becoming unfavourable for them.
Government rules are unavoidable & need to be followed at any condition.

4. Economic Causes: Condition of the economy also affects business

performance. Sometimes the economy faces conditions like poverty &
recession. This affects the overall market. Demand for the goods and

1. Jasmin Harvey, “Introduction to Managing Risk” CIMA London,2007.

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 services decline affecting the business operations. This brings a slowdown in
business operations thereby bringing losses.

5. Human Causes: These are the causes on the part of a human that leads to
risk. These causes include activities like theft, robbery, carelessness, work
stoppage due to riots, strikes, failure of power etc. These causes bring heavy
losses for the business. These need to be handled properly on time. The main
reason behind all these activities is the failure of management.

TYPES OF ENTREPRENEURIAL RISK

Risks are identified through a number of ways. Strategies to identify these risks
rely on comprehensively analysing a company's specific business activities.
Most organizations face preventable, strategic and external threats that can be
managed through acceptance, transfer, reduction, or elimination. Various types
of entrepreneurial risks can be divided into following categories:

1. Speculative Risk: Speculative risks are those risks where there is always a
possibility of a profit or loss. These are undertaken with the intention to
earn profit, but there always remains a possibility of loss. These risks are
not insurable in nature. Speculative risk is normally associated with trade.
Buying shares in the stock market can result in profits, losses or neither
due to the speculative risk inherent in that activity. Also, a company can
incur losses due to a decrease in sales as a result of inflation. Speculative
risk includes all investment and market risk. All speculative risks produce
two outcomes of an event i.e., either a profit or a loss.

2. Pure Risk: Pure risk simply refers to a situation that if damage is to occur
then the outcome will lead to loss of a person or property completely or a
break-even situation. The possibility of accidents in a factory, on the road
or riots are classified under pure risk. A natural disaster is one of the risks
that are pure in nature, where no one would profit from the event of a
flood or an earthquake. Pure risk is a type of risk in insurance that is
difficult to avoid and determine, however it can be insured against.
Pure risk is one of the risks that can be directly linked to personal, property and
liability risk:

a. Personal Risk: personal risk falls under pure risk. Personal risk refers to
the individual. This risk is concerned with the health or safety of an
individual. Accidents and illness are considered in this type of risk. Also,
death, disability, retirement and unemployment are directly linked to
personal risk. Personal risk can detrimentally affect the income earning

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 capacity of an individual due to the sudden loss of financial assets or
sudden death.

b. Property Risk: Property risk is the second type of risk in insurance that is
classified under pure risk. Property risk refers to risk events that affect an
organisation’s facility and other physical infrastructure. This includes
anything that can cause a partial or total loss of property such as theft, fire
or natural disasters. Property risk can stop a business from operating
resulting in material and financial losses in addition to the damages they
cause. Adverse weather conditions and terrorist attacks are also
considered in this type of risk.

c. Liability Risk: Another type of risk in insurance that is under pure risk is
liability risk. This is personal or business risk associated with being liable
to another party due to negligence or wilful acts that may cause a loss to
another individual or another person’s property. For example, reckless
driving or failure to perform contractual obligations. This liability risk is
associated with legal liabilities to third parties.

3. Dynamic Risks: Dynamic risk are like speculative risks. Dynamic risks
are those which are the outcome of any change in the society. Such
changes are not easy to predict and may bring about financial losses.
Such changes include a global pandemic, changes in the income levels,
tastes and preferences of individuals. Dynamic risk is difficult to measure
and insure.

4. Static Risks: Static risk is the kind of risk that remains constant over time.
Such risk results from human mistakes or actions of nature. These risks
are similar to pure risks. For example, employee dishonesty or the
embezzlement of funds in a company by one the employees. Static risk
can be measured easily and is insurable.

5. Fundamental Risks: Fundamental risk is a type of risk that the individual

has no control over. Such risks are said to be impersonal in their origin
and consequences. Also, the impact of fundamental risk can affect the
rest of the population. Natural disasters and recessions are good examples
of fundamental risks.

6. Particular Risks: This type of risk in insurance arises as a result of the

actions or interventions of an individual or a group of people. An accident
is an example of particular risk.

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 RISK MANAGEMENT OR CONTROL OF RISKS

A good risk management structure should also calculate the uncertainties and predict
their influence on a business. Consequently, the result is a choice between accepting
risks or rejecting them. Acceptance or rejection of risks is dependent on the tolerance
levels that a business has already defined for itself.
If a business sets up risk management as a disciplined and continuous process for the
purpose of identifying and resolving risks, then the risk management structures can be
used to support other risk mitigation systems. They include planning, organization,
cost control, and budgeting. In such a case, the business will not usually experience
many surprises, because the focus is on proactive risk management.
Importance of Risk Management
Risk management is an important process because it empowers a business with the
necessary tools so that it can adequately identify and deal with potential risks. Once a
risk has been identified, it is then easy to mitigate it. In addition, risk management
provides a business with a basis upon which it can undertake sound decision-making.
For a business, assessment and management of risks is the best way to prepare for
eventualities that may come in the way of progress and growth. When a business
evaluates its plan for handling potential threats and then develops structures to address
them, it improves its odds of becoming a successful entity. In addition, progressive
risk management ensures risks of a high priority are dealt with as aggressively as
possible. Moreover, the management will have the necessary information that they can
use to make informed decisions and ensure that the business remains profitable2.

2. “Risk management” available at: https://www.investopedia.com/articles/financial-theory/09/risk-

management-business.asp

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 STEPS IN RISK MANAGEMENT
Risk management is a continuous effort to be aware of operational uncertainties to
minimise the loss potential of a company. Risk management is a plan to prevent the
happening of such events that destroys the company’s assets or contributing resources.
The fiscal integrity and current position of the company is adversely affected by
unplanned incidents or losses. Risk management provides a precise plan to handle
various types of contingencies. In other words, risk management include all efforts
made by a company to minimise the outcome of uncertain events or risks3.

The different steps that risk manager must take to minimize the uncertainties and
change of loss are as follows:
1. Identifying the source of Risk: The risk manager is to locate the source or cause
of risks. He is to determine where the source of risks for company lie. This
includes fixed assets and property, other area of potential loss like property
borrowed, business interruption, natural risks like flood, earthquakes etc. may
involve financial loss and may create financial liability to injured or affected
third party.
2. Measurement of Risk: The risk manager makes a loss study using historical
data to eliminate future losses. The past experience and historical data enable a
manager to decide in advance how many and to what size of losses may occur
in future as a result of outcomes of an uncertain event. It also helps all the
parties to calculate the volume of insurance, premium amount etc.

3
“The Risk Management Process Management Essay” Retrieved from
https://www.ukessays.com/essays/management/the-risk-management-process-management-essay.php?vref=1

9 | University Institute of Legal Studies.

 3. Treatment of Risk: After the completion of risk analysis, the next step is to
decide what risks may be retained and what risks will be transferred to others.
4. Selection of Suitable Methods of Risk Handling: There are various techniques
of risks handling such as avoidance, prevention, assumption, reduction, transfer
or insurance of risk. It is essential to select an appropriate method to take care
of the risk.
5. Implementing the selected methods: After the selection of suitable method, it is
necessary to implement the selected method to cover the risk, taking into
consideration of all important factors affecting its successful implementation.
Various factors like cost of insurance, required information, amount of
periodical premium, financial condition, amount of loss require proper
attention while implementing an appropriate method.
6. Feedback: Feedback is evaluation of results of selected method. Evaluation of
results of adopted method must be done after a certain interval. Corrective
actions or measures must be taken to eliminate the bad results of effects of
implementation.

RISK HANDLING TECHNIQUES

When creating contingencies, a business needs to engage in a problem-solving
approach. The result is a well-detailed plan that can be executed as soon as the need
arises. Such a plan will enable a business organization to handle barriers or blockage
to its success because it can deal with risks as soon as they arise.
Comprehensive business risk management is a multi-stage process that will vary
depending on the needs and requirements of each individual enterprise. Response to
risks usually takes one of the following forms:
a. Avoidance: Obviously one of the easiest ways to mitigate risk is to put a
stop to any activities that might put your business in jeopardy. However, it's
important to remember that with nothing ventured comes nothing gained,
and therefore this is often not a realistic option for many businesses. A
business strives to eliminate a particular risk by getting rid of its cause.
b. Risk Reduction: The second risk management technique is reduction -
essentially, taking the steps required to minimise the potential that an
incident will occur. Risk reduction strategies need to be weighed up in
terms of their potential return on investment.
c. Acceptance: In some cases, a business may be forced to accept a risk. This
option is possible if a business entity develops contingencies to mitigate the
impact of the risk, should it occur. Finally, risk acceptance involves 'taking
it on the chin', so to speak, and weathering the impact of an event. This
option is often chosen by those who consider the cost of risk transfer or
reduction to be excessive or unnecessary. Risk acceptance is a dangerous
strategy as your business runs the risk of underestimating potential losses,

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 and therefore will be particularly vulnerable in the event that an incident
occurs.
d. Assumption of Risk: As risk is unavoidable to the full extent, therefore we
must assume some risk it is the best method to retain the risk with self by
creating some contingency reserves or funds to meet such losses. The non-
insurable risks are covered by maintaining funds at own level.
e. Insurance: the unavoidable insurable risks may be transferred to an
insurance company by purchasing appropriate policy. Modern insurance
system is capable of taking over the largest possible risks relating to persons
property and liability this is the most widely used device of risk avoidance.
f. Risk Transfer: Risk transfer is a common risk management technique
where the potential loss from an adverse outcome faced by an individual or
entity is shifted to a third party. To compensate the third party for bearing
the risk, the individual or entity will generally provide the third party with
periodic payments.
The most common example of risk transfer is insurance. When an
individual or entity purchases insurance, they are insuring against financial
risks.4
Techniques of transferring risk
1. Insurance policy: As outlined above, purchasing insurance is a common method of
transferring risk. When an individual or entity is purchasing insurance, they are
shifting financial risks to the insurance company. Insurance companies typically
charge a fee – an insurance premium – for accepting such risks.
2. Indemnification clause in contracts: Contracts can also be used to help an individual
or entity transfer risk. Contracts can include an indemnification clause – a clause that
ensures potential losses will be compensated by the opposing party. In simplest terms,
an indemnification clause is a clause in which the parties involved in the contract
commit to compensating each other for any harm, liability, or loss arising out of the
contract.
3. Risk Transfer by Insurance Companies: Although risk is commonly transferred
from individuals and entities to insurance companies, the insurers are also able to
transfer risk. This is done through an insurance policy with reinsurance companies.
Reinsurance companies are companies that provide insurance to insurance firms.
Similar to how individuals or entities purchase insurance from insurance companies,
insurance companies can shift risk by purchasing insurance from reinsurance
companies. In exchange for taking on this risk, reinsurance companies charge the
insurance companies an insurance premium.

4
“Risk transfer” available at: https://corporatefinanceinstitute.com/resources/knowledge/strategy/risk-transfer/

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 CONCLUSION

The risk analysis process assists the effective and efficient operation of the
organisation by identifying those risks which require attention by management.
They will need to priorities risk control actions in terms of their potential to
benefit the organisation. Effectiveness of internal control is the degree to which
the risk will either be eliminated or reduced by the proposed control measures.
The proposed controls need to be measured in terms of potential economic
effect if no action is taken versus the cost of the proposed actions and invariably
require more detailed information and assumptions than are immediately
available. Regular audits of policy and standards compliance should be carried
out and standards performance reviewed to identify opportunities for
improvement. It should be remembered that organizations are dynamic and
operate in dynamic environments. Changes in the organisation and the
environment in which it operates must be identified and appropriate
modifications made to systems. The monitoring process should provide
assurance that there are appropriate controls in place for the organization’s
activities and that the procedures are understood and followed.
___________________________

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 REFERENCES

1. Jasmin Harvey, “Introduction to Managing Risk” CIMA

London,2007.

2. “The Risk Management Process Management Essay” Retrieved

from https://www.ukessays.com/essays/management/the-risk-
management-process-management-essay.php?vref=1

3. “Risk transfer” available at:

https://corporatefinanceinstitute.com/resources/knowledge/strate
gy/risk-transfer/

4. “Risk” available at: https://financialyard.com/types-of-risk-in-

insurance/

5. “Risk management” available at:

https://www.investopedia.com/articles/financial-theory/09/risk-
management-business.asp

_________________________________

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