"WHERE KNOWLEDGE IS WEALTH"

Saturday, July 26, 2008

RISK MANAGEMENT VIS-A-VIS RETAIL TRADING

ABSTRACT

The article deals with risk management vis-à-vis retail trading. It clearly says that risk is inherent part of life and lays stress on the importance of risk in our life. It focuses on the risks involved in small businesses and retail business. Anticipating and managing pilferage, dead and damaged stocks, the liquidity crunch and the involvement of interest burden in retail business are dwelt at length. It has taken the case study of a vegetable vendor doing business with business acumen and without formal education. The article lays stress that you cannot eliminate risk but you can only minimize risk by managing effectively and efficiently. At the end it concludes that not to take a risk is also a risk.

KEY WORDS: What is Risk Management? Pilferage and Damaged Stocks, Liquidity Crunch in Business, Involvement of Interest Burden, Business Acumen of a Vegetable Vendor, Tools to Manage Risk, Diversification of Risk, How to Make a Purchase Decision? Managing Dead Stock in Retail Business, Risk Management in Small Businesses & Conclusion.

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“A ship is safe in harbor, but that's not what ships are for.” William Shedd

WHAT IS RISK MANAGEMENT?

It is essential to explain about risk before focusing on risk management. Risk is the element of uncertainty involved in every aspect of our life be it in personal, professional and social life. Nobody would like to invite risk. But everyone faces risk either intentionally or unintentionally because risk is part of life. It is basically because of the ‘fear of failure’ or ‘fear of criticism’ or other reasons people avoid taking risks. But the silver lining of risk is the ability to create or innovate, which will unfold lot of prospects. At times, risk is like a boon in disguise. When we deliberate about risk management it is nothing but managing the uncertainty. According to Wikipedia, “Risk management is a structured approach to managing uncertainty related to a threat, a sequence of human activities including: risk assessment, strategies development to manage it, and mitigation of risk using managerial resources.”

Risk management is the term for the procedures that an organization follows to protect itself, its staff, its clients, and its volunteers. Practicing sound risk management is more than just looking out for potential problems, buying insurance, and avoiding lawsuits. It is an ongoing process. To define succinctly, risk management is the process of identifying the threats arising out of uncertainty and the potential problems and, if possible, averting the same, if not, minimizing the same to a larger extent by systematic and scientific approaches and methods.

PILFERAGE AND DAMAGED STOCKS:

In retail business usually we find pilferage of items by customers and by workers also. It is a type of risk that can be anticipated and can be contained. It is for this reason why video cameras are placed in various retail stores so as to check pilferage. Of course, cameras will also help the location of the staff and their performance in handling customers. Sometimes the goods are damaged due to improper handling or negligence or due to unforeseen accidents. These are all the risks involved in retail business and anticipating the same would help in effective risk management.

LIQUIDITY CRUNCH IN BUSINESS:

Liquidity tightness happens in business that is another risk in any business. And especially in retail trading there could be wide fluctuations as at some particular timing there will be high presence of customers and low presence of customers. Similarly we can expect heavy flow of customers especially on weekends, as office goers would be free to buy during this period. As a result, there will be good cash flow in the weekends and average cash flow during weekdays. Sometimes there will be liquidity crunch to meet the obligations if there is no brisk business activity due to unforeseen situations. Therefore, it is advisable to keep cash ready to meet such situations. It, again, comes under risk management.

INVOLVEMENT OF INTEREST BURDEN:

Business people borrow money on interest to meet their commitments. For a real businessperson commitment, indeed, is more important than making money as once the commitment is not honored the business person loses his credibility and good will. Every businessperson strongly believes that money can be earned at any time but not the lost good will. In order to honor his commitments he borrows money on interest and fulfils his commitment. In case if he is not able to generate adequate business then there will be interest burden mounting into more interest payments. In the long run, it affects the profit levels and closure of business. Therefore, involvement of interest becomes another factor in risk management.

BUSINESS ACUMEN OF A VEGETABLE VENDOR:

Let us take the case study of a vegetable vendor who manages the risk in his business although he may not have formal education. For instance, he buys ten varieties of vegetables from the wholesale market for selling in retail. In the first round, he sells the stocks, which are very fresh with handsome profits till he liquidates half of the stock. In the second round, he sells the balance stocks with nominal profits because the fresh stocks have already been sold. In the final round, he sells the stocks that are left over even for loss with an intention to liquidate and encash. In the third scenario, his intention is not to make profits but to encash, as the stocks if stored may result into getting rotten and also it helps in avoiding any hiccups as well as to keep the cash ready for the next purchase. Vegetable vendor does business based on intuition and gut feeling. Since he has been doing business for a long time he developed intuition and that can also be called as business acumen and that helps him.

TOOLS TO MANAGE RISK:

Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories

Avoidance (eliminate), Reduction (mitigate), Transference (outsource or insure), and
Retention (accept and budget).

As far as possible the potential problems are to be averted and if not should be eliminated in toto. In the second category the efforts should be made to mitigate the problems. In the third category, there must be provision to insure the problem. In the final category it is necessary to accept the problems and earmark some budget for the same.

Risk can arise due to internal factors or due to external factors or forces. If risk arises due to internal factors either due to negligence or due to ignorance there is a need to own the responsibility and see to it that such things do not recur. If the risk arises due to external factors, which are beyond human imagination and control, there is nothing to bother much. But at the same time, lessons should be learnt and precautionary measures be taken.

DIVERSIFICATION OF RISK:

It is always advisable to have diversified products in retail trading so as to minimize risk. It is not necessary that all the stocks should be sold and it is not possible as no one can predict the sales with total business acumen. Keeping diversified range of products at the retail counter will help cater to larger customers where customers would be comfortable in buying everything under one roof. It also helps in minimizing the risk of piling up the stocks permanently. There would be movement of some products and effective running of business as cash keeps flowing into the business. Hence, it is vital to keep multiple products although in less quantity to cater to consumers so as to ensure effective cash flows and proper business rotation.

HOW TO MAKE A PURCHASE DECISION?

Proper purchase decision helps in minimizing the risk in any business to avoid stocks getting piled up which is also known as dead stock. If the businessperson has sufficient cash then it is advisable to buy against cash so as to avail cash discount. If the business is wholesale it is advisable to buy in bulk quantity, as there is discount for purchasing in bulk quantity. Before making purchases it is necessary to forecast the demand by surveying the market if the business happens to be new. If it is the running business then it is essential to check the previous records about the history of sales and accordingly the purchases can be made. Right judgment is needed to forecast the demand and then accordingly the purchase orders can be made.

After deciding the quantity required in various items then it is the time to take a call in placing orders. It is vital to call various suppliers about their prices, offers, discounts etc., without giving information about other suppliers. It helps in engaging the suppliers to compete and quote the best prices. Then the supplier who quotes the best reasonable price can be given an opportunity. This is how the purchase decision has to be made. Lot of research has to be done about the reliability and credibility of the suppliers and their capacity to deliver the stocks promptly as per the commitment. It is always easier said than done. Therefore, purchase decision is one of the keys to contain risk and it is part of risk management in any retail business.

MANAGING DEAD STOCK IN RETAIL BUSINESS:

However intelligent and experienced a businessperson might be there will be room for improper judgments. And that results into getting the stocks piled up becoming into dead stock or non-saleable stocks. Efforts may be made to return the suppliers if they are in a position to take back the stocks and if not then serious efforts should be made to sell the stocks at lower prices and even for loss. This helps in more space in the store rooms/warehouses and the same amount can be rotated in business. It is folly to hold the stocks in godowns/warehouses for long time as it involves payment of rents to godowns and also the stocks getting further destroyed. In retail business managing the dead stock is one of the key components of risk management.

RISK MANAGEMENT IN SMALL BUSINESSES:

To manage risk in your business :

· Write your business plan.
· Go through your business plan critically looking at every area that could involve risk, making a list of what areas you need to consider.
· Take time, preferably with others who know your business, to brainstorm all the possible catastrophes that might occur.
· From your lists developed in steps 2 and 3, decide what action or coverage is needed to handle that possibility.
· For those risks that can be handled by insurance coverage, determine how much and what type of insurance is needed.
· Choose a reasonable amount of insurance to cover those risks.
· Contact more than one insurance agent to get quotes on the insurance that is needed.
· Arrange for insurance coverage to begin before the doors open on your business, if possible.
· For those risks not covered by insurance, put together a contingency plan for handling each of the risks identified.
· Train all employees in what to do in any if any of these (or other) emergencies arise.
· Put your plan in a place where it can be located quickly, if needed. Have an extra copy in a safe location.
· Review your plan annually, including input from all employees.

CONCLUSION:

“Fear of failure must never be a reason not to try something.” Frederick Smith

Let us realize and learn that not to take a risk is also a risk. Life is worth living if it has uncertainty and challenges. At the same time, there should not be recklessness towards risk. It is essential to take calculated risks in life so as to lead progressive life. To sum up, it is impossible to eliminate risk in our daily. Let us accept the fact and learn to manage risk effectively and efficiently.

T H E E N D

2 comments:

PROF. M.S.RAO said...

Very interesting indeed to read this article. It seems lot of research is done.

Encouraging article for all to take risk.
Excellent Keep it up.

tim watson said...

That's wonderful post. Keep posting.