Accepting Risk

Reviewed by Sweta | Updated on Aug 27, 2020

Introduction

Accepting risk refers to an individual’s acceptance of risk of loss and yet accepting the risk. The method of accepting risk is a way of risk retention and risk management. Generally risk acceptance involves risks which are small and less and which can be managed without much of a problem. Such risks can be relatively easy to deal with.

Understanding Accepting Risk

  • Businesses employ different techniques to manage risks associated with a transaction or business activity such as running a factory. First, a business needs to identify the risks, then assess their gravity and finally prioritise risks to monitor, minimise their effects and control the risk. A better risk management is at the heart of a successful business.
  • While managing risks, businesses should be able to balance the costs involved in risk management with the costs arising from the risk. The most common types of risks can include credit risk, project failures, uncertainty in financial markets, accidents, legal liabilities, natural disasters and risks from competitors.
  • A trade-off should exist between the effects of the risk and the costs of managing the risk. A business should prioritise different risks and accordingly budget for the same. A business takes insurance to provide for the different risks such as fire insurance, employee insurance, stock insurance and so on.
  • There can be situations where a business accepts risks greater than the size and capacity of a business. This happens in the case of mergers or acquisitions where a company assumes greater debt than the capacity to service. Also the company may not be able to manage the combined business and also take benefits from the business synergies.

Conclusion

A company should assess the risks involved in the short-term and long-term financial decisions. Each company has a different risk appetite and business appetite. The company should evaluate the potential business or investment from a financial perspective assessing the costs of managing risks as against the returns from the venture. Thus, risk identification, assessment, management and mitigation are important for any business.