RISK TAKING

RISK TAKINGEngineering EntrepreneurshipSecond Semester of A.Y. 2014/2015International ProgramCivil Engineering DepartmentFaculty of EngineeringUniversitas Atma Jaya YogyakartaCONCEPT of RISKDEFINITION: negative consequence of uncertainty in the future which brings disadvantage/loss to businessmen OR possibility of damage, injury, or lossHigh risk, high returnMotivation of risk taking: wish to obtain rate of return/profit proportional to sacrifice determination of profit targetno choice

SOURCE of RISKMarket: competition, price changes, style changes, competition from new products, and changes from fluctuating economic conditions.Accidents: a merchandise shipment of tennis shoes may be destroyed in transit, a warehouse may burn down and large amounts of expensive inventory may be lost.TYPES of RISKPURE RISK: impact of situation or decision whose consequence is loss, e.g.asset loss/damage due to fire, theft, embezzlementwork accident in production processindictment, e.g. poisoned foodoperationalforce majeure: flood, earthquake, tornado, etcTYPES of RISKSPECULATIVE RISK: impact of situation or decision who consequence can be profit or loss, e.g.price changeIncrease input price decrease profit marginDecrease input price increase profit marginIncrease output price increase profit marginDecrease output price decrease profit margindebt: fail to pay

TYPES of LOSSDIRECT LOSS: nominal amount, e.g. fire due to short circuit goods & buildingINDIRECT LOSS: fail of selling or profit due to risk, additional operational cost, lost of investment opportunityPROBABILITY of RISK CALCULATIONHow frequent risk occursImpact of riskLoss estimation = frequency x impact

RISK MANAGEMENTEffective management particularly to speculative risks: careful control of financing, product development activities, production, marketing, distributionContingency planPareto principle: put potential risks in descending order based on estimated loss resulted & manage the risks with highest estimated lossesRISK MANAGEMENTStrategy choice: Risk control: reduce risk probability to reduce impact, e.g. provide & implement good SOP, serious control upon quality of product & process, equip production area with work safety tools, introduce risk awareness culture to all employeeRisk transfer: fire insurance company, fixed labor cost outsourcing, high work capital customers early payment, high supply cost supplierRisk retention: payment of risk with/without special allowanceWith special allowance increase work capitalWithout special allowance new risk: interruption of business processRisk avoidance: restaurant does not sell cold drink when it is forecasted to rain heavily during coming week. Frequent risk avoidance might lead to slow business development due to many missed opportunities

RISK REDUCTIONthrough careful planning and decision-making with activities such as:analyzing current and future economic and market conditions.considering the consequences of alternative actionsmaking reasonable decisions in response to conditions as they develop and change.

CASE STUDYJill Kearns was in her first year of college, and was running low on money. She needed to make at least $500 to cover her expenses. She considered getting a full-time job, but realized that she did not have enough time to do her studies and keep the job. Her solution was to start a small business venture with the members of a jazz band to which she belonged. They would hold jazz concerts and sell tickets to Jill's performances. Jill's idea for this venture came from her own and a friend's interest in jazz. As the popularity of jazz has grown, she would have seen the potential for a business venture expanding. The idea of using her interest in music to earn the money was very appealing. Currently, the group members have $500 in the bank. In order to give a concert, Jill anticipated that they would have the following start-up expenses: an advertising cost of printing posters, rent on a concert hall, cost of printing tickets, and incidental expenses for transportation, telephone calls, etc.CASE STUDYBy deferring as many payments as possible and obtaining credit, she found that they needed$465to hold their first concert. Jill figured their total expenses would be about $2000. By giving two shows and multiplying the ticket price by the legal capacity of the hall, she calculated that the maximum gross receipts would be $2900. The business venture would earn a profit of $900!

CASE STUDYWhat risks are involved in this business venture?How could these risks be reduced or eliminated?

Source: PACE, Program for Acquiring Competence in Entrepreneurship, CETE/OSU, Columbus, OHPOTENTIAL RISKSPeople do not like/are not satisfied with the first performance and the next (second) performance will have less audience/bigger failureNumber of sold tickets does not reach target to earn profitTeam disputeMusical instruments conditionConcert hall condition (electricity, lighting)Team management (money keeper)Force majeureFalsified ticketsRISKS REDUCTIONSurvey of jazz fans interest to fit the songs to itPromotion: early bird ticket purchase for first show reduce profitContract managementRegular checkEarly check and transaction agreement (term and condition)Multi holder bank accountTerms & conditionsSecurity for tickets (hologram, etc)