Minimizing Risk through Management Practices

There are two general methods of minimizing market risks. One is to lessen the chance of their occurrence, through good management practices. The other involves shifting risks to others who are better able or more willing to assume the hazard.

All classes of market risk can be reduced, frequently to a very considerable extent, through various management practices. To an increasing extent, large business firms regard the task of risk management as an important function which requires for proper performance specialized personnel who analyze risks, ascertain potential losses, institute corrective or risk-reducing measures, as well as handle decisions about insurable risks.

Preventive measures are employed to minimize possible losses from physical destruction or deterioration. Fire hazards are decreased by fireproof buildings and safeguards such as sprinkler systems, night watchmen, or fire inspections. Provision of proper storage conditions may forestall losses due to vermin, dirt, or extreme temperature changes.

Risks of theft can be minimized by the use of burglar alarm systems, night watchmen, safes for the protection of money or high-value merchandise, and other similar practices. Losses from shoplifting can be kept at a minimum by appropriate methods of displaying merchandise most likely to be pilfered; by training store employees to be observant in "policing" the selling area; and, in large institutions, by the use of store detectives.

Some personal risks, including accidents and, to a certain extent, sickness of employees, may be prevented by the adoption of safety devices, proper ventilation, and healthy working conditions. To guard against losses that may arise in the case of death or illness of key employees, competent substitutes can be trained for responsible positions.

For most firms, the only effective way to minimize credit risks is through efficient management in the granting of credit and the collection of accounts. This does not mean that all losses from bad debts will be eliminated. The most successful credit manager is not the one who has practically no losses but one who reduces losses from uncollectible accounts to a minimum, without sacrificing sales volume. Some losses must be expected in all businesses, and creditors should stand ready to bear their proportionate share. To keep this share of losses down to a minimum, sound control of credit operations is essential.

Both time and place risks of changes in market conditions can be controlled to a considerable extent through good management. Since most risks of market conditions result from changes in, or uncertainties regarding, supply and demand conditions, well-managed firms find it advisable to make careful qualitative and quantitative analyses of markets, and to gather and intelligently interpret market news from various sources. Only a study and analysis of information gathered from various sources enable one to ascertain the current status of the market and to forecast its future trend.

Proper and adequate control of inventories is a significant earmark of successful management. Only in this way can a buyer determine the quantity and quality of goods to be bought from time to time in order to prevent overstocks on the one hand and "outs" on the other. Careful planning of financial, merchandise, manufacturing, and selling requirements and a proper coordination of these factors contribute much toward the reduction in risks of vendor or purchaser.