Entrepreneurial Risks
Entrepreneurs encounter different types of risk. The first type of risk the encounter is market risk. Market risks are risks associated with fluctuations in the credit rates, inflation rates, exchange rates and interest rates (Jesselyn, 2006). Fluctuation in these rates may lead to a decline in the value of investment. Another type of risk faced by entrepreneurs is environmental risk. These are risks that originate from the business external environment of the business (Jesselyn, 2006). These risks may include; political events, social events, technological changes and competition.
Environmental risks may also result in decline in the value of investment. The third type of risk is operational risk. These are risks that originate from the routine operations of the business. Operational risks may include; breakdown of equipment, accidents such as fire, theft and strikes by employees. Operational risks may affect normal business functions thus resulting in losses for the company.
There are four different strategies of mitigating the impact of the above risks. The first strategy is risk avoidance. Risk avoidance involves abandoning activities that could results in the occurrence of the risk (Jesselyn, 2006). In this case, the entrepreneur assesses the risk tolerance of his business and avoids the most devastating risks. The second strategy for managing risks is risk reduction. These are strategies that are directed towards minimizes the impact of risks when they occur. Risk reduction strategies may include; insurance cover and implementing risk control mechanisms (Jesselyn, 2006). For example, an organization may implement strict security policies in order to avoid theft.
The third approach of managing risk is risk transfer. This involves transferring the risks to a third party (Jesselyn, 2006). Outsourcing of services is a good example of risk transfer strategies. The final approach of managing risk is risk retention. Risk retention entail pursuing activities despite knowledge of the potential of these activities to cause harm to the business. Risk retention strategy is viable when the magnitude of the risk involved is not detrimental to the business, when the magnitude of return justifies the risk or when all the other approaches such as outsourcing and insurance would be more expensive than the cost of risk.
References
Jesselyn M. (2006). Fresh Perspectives: Entrepreneurship. Pearson South Africa
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