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How to identify, assess and manage the risks associated with trading

All trading activities involve some level of risk, so risk management is a vital part of knowing how to trade. There are three steps to risk management:

1

Identify the risks associated with your trading activity

The risks associated with trading can usually be divided into four categories: financial, marketing, operations and people. You need to identify the specific risks you face in each category. Here are some examples:

Financial

  •  Inaccurate financial forecasts
  • Inaccurate cost estimates
  • Changes in cost of finance, taxation or other external factors
  • Changes to the implementation timetable

Marketing

  • Changes in demand for products or services
  • New sources of competition
  • Changes in customer needs or expectations
  • Adverse impact on organisational reputation

Operations

  • Problems achieving consistent quality standards
  • Difficulties with suppliers
  • Problems with equipment or machinery

People

  • Over-reliant on key personnel
  • Difficulties acquiring and developing new skills
  • Problems recruiting and retaining additional employees and/or volunteers.
2

Assess the likelihood and potential impact of these risks

Once you have identified the risks associated with your trading activities the next step is to assess these risks, and to decide which risks require special attention. One way of doing this is to assess each risk against two criteria:

  • Likelihood of the risk occurring (high, medium or low)
  • Impact on the organisation if the risk occurs (high, medium or low).

So, for example, if the likelihood and impact are both high then you need to attach a high priority to managing the risk, whereas if the likelihood and impact are both low, you might decide the risk requires no immediate attention.

3

Manage the risks

There are four main approaches you can take towards the risks you have identified:

  1. Risk avoidance: This means deciding not to undertake the chosen activity, and usually only applies to situations where the likelihood and impact are both considered to be high.
     
  2. Risk reduction: This involves taking actions to reduce the likelihood and/or impact of the potential risk. For instance, it may involve staff training to ensure you have enough people capable of performing a key role in the event of absence or illness. 
  3. Transfer the risk: It may be possible to transfer the risk to another party, either by purchasing an insurance policy or getting someone else to accept the risk. For instance, rather than employing more staff to meet an increase in demand for services, you might choose to use freelance workers until you are sure the increase in demand is long term. 
  4. Accept the risk: This means you acknowledge the risk and decide to accept the consequences should it occur. You may even decide to build this level of risk into operational plans. For instance, if you are running a shop you might plan for a certain level of shoplifting, which is built into your cost projections for that area of trading.

Further information

For further information look at NCVO's Risk Management Framework which provides a ten-point plan for managing risk. NCVO also have a section on risk and uncertainty  on their Strategy and Impact website.

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Page last edited Jul 05, 2017 History

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