VARIOUS TYPES OF RISKS

Overview

Under conditions of perfect competition, increase in an entity's risk should result in an increase in
expected return. Under similar circumstances, a risky investment would not be pursued if a lower
risk alternative provides the same reward. Therefore, controlled and uncontrolled transactions and
entities are not comparable if they do not assume similar risks and it is not possible to make
appropriate adjustments for the differences in risks assumed. For the activity, ABC India and its
AE is engaged in, the corresponding risks likely to affect the AEs (including the Company) are
listed as under:

1. Accounts receivable risk (also called as credit risk / customer credit risk)

Accounts receivable risk is the risk that a client will be unable to fulfill its obligation to pay for its
purchases or services under the terms of its contract. Another component of accounts receivable
risk is the cost of replacing a customer order after that client has defaulted.

2. Business risk (also called as market risk)

Business risk occurs when a firm is subjected to adverse sales conditions due to either increased
competition in the marketplace, adverse demand conditions within the market, or the inability to
develop markets or position products to service targeted customers. Business risk represents
standard risk borne by any enterprise in market driven transactions. Business risk affects the
ability of a company to meet short and long term financial obligations if prices and/or quantities
demanded decrease.
 Types of risks

3. Capacity utilization risk (also called as idle capacity risk)

Capacity utilization risk is the risk arising out of on bench / unutilized work force. It determines
the risk of under utilisation of resources and also the risk associated with under exploitation of
market opportunities.

4. Cargo risk

Cargo risk is the risk in respect of loss or damage to shipments while in custody.

5. Contract risk

Contract risk is the risk associated with entering into contracts with vendors / customers for
purchase and sale of components or products. These risks are mainly linked to the terms of the
contract such as termination of the contract, transfer of title, delivery schedule, terms of payment,
mode of delivery, in-transit risk, etc.

6. Cost over-run risk

Cost over-run risk arises in the cases wherein the actual costs incurred for the transaction exceed
the scheduled fees.

7. Credit risk (also called as accounts receivable risk / customer credit risk)

Credit risk is the risk that a client will be unable to fulfill its obligation to pay for its purchases or
services under the terms of its contract. Another component of credit risk is the cost of replacing
a customer order after that client has defaulted.

8. Currency risk

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 Types of risks

Currency risk arises from any adverse revaluation of assets and liabilities due to fluctuation in
exchange rates, which would eventually have a negative impact on the profitability of the
enterprise.

9. Damage risk (mainly for cargo companies)

This is the risk that the goods being moved by the Origin Company (“OC”) are damaged / lost in
transit and the OC has to compensate the customer for the loss. This risk moves with the
possession of the goods.

10. Development risk

Development risk is the risk of success or failure of development to create valuable intangible
assets for a company.

11. Foreign exchange fluctuation risk

Changes in currency rates can cause foreign exchange profits and losses where products,
resources or services are purchased in one currency and then sold in another currency. These
profits or losses can also arise when there is a time lag between act of raising invoices and actual
payment.

12. Human capital risk

Every organization has to employ people, train them adequately so as to suit the requirements of
the company and thereby converting them into assets of the company. There always exists a risk
of trained staff leaving the organization and other factors affecting productivity and efficiency.

13. Human resource risk (also called as manpower risk)

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 Types of risks

Human resource risk is the risk of increase in the manpower turnover and also the risk of
unavailability of talented and skilled manpower.

14. Idle capacity risk (also called as capacity utilization risk)

Idle capacity risk is the risk arising out of on bench / unutilized work force.

15. Inventory risk

Inventory risk is the risk associated with, among others, having too much or too little inventory
on hand, losses associated with market influences, product obsolescence, leakage and product
damage.

16. Process risk

The logistics business earns paper-thin operating margins and therefore can become
un-competitive if its processes are not highly tuned and abreast with time. For instance a
competitor may snatch all the business by offering cheaper services as a result of having a better
infrastructure in place.

17. Manpower risk (also called as human resource risk)

Manpower risk is the risk arising from the unavailability of talented and skilled manpower.

18. Market risk (also called as business risk)

Market risk occurs when a firm is subjected to adverse sales conditions due to either increased
competition in the marketplace, adverse demand conditions within the market, or the inability to
develop markets or position products to service targeted customers. Market risk represents
standard risk borne by any enterprise in market driven transactions. Market risk affects the

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 Types of risks

ability of a company to meet short and long term financial obligations if prices and/or quantities
demanded decrease.

19. Operational risk

Operational Risk is the risk of loss resulting in inadequate or failed internal processes, people and
systems or from external events. It also refers to the risk arising from data loss due to network
breakdown and delay in deliveries.

20. Political and economic risks

This risk primarily arises on account of operating in geographical jurisdictions with unstable
political regimes and unfavorable government economic policies.

21. Product / Service development risk

Product / Service development risk is the risk of success or failure of an effort to create valuable
product / service. For example, expenses incurred for the development of a new product may or
may not be a successful venture.

22. Product liability risk (also called as warranty risk)

Product liability is the risk associated with negligence with respect to the quality of the
manufactured products. It refers to the risk of having to bear the cost of a claim or return of a
defective product. Depending on warranty terms, this cost may have to be incurred through the
repair or replacement of defective products.

23. Product price risk (also called as product risk)

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 Types of risks

Product risk is the risk that the value of future income streams is subject to external market prices
or market rates. Effectively, it is the risk that a firm will not be able to sell products for the prices
it anticipated after the product was purchased.

24. Security risk

Security risk is the risk of non-recovery of interest or principal amount.

25. Service liability risk (or scheduling risk)

Service liability risk is related to non-performance of services or when the company fails to
perform at accepted or advertised standards under the contract. The risk is associated to bear the
cost of a claim or non-performance / under-performance of services. Depending on terms and
conditions, this cost may have to be incurred through correction of defective services.

26. Service price risk

Service price risk is the risk that the value of future income streams is subject to external market
prices or market rates. Effectively, it is the risk that a firm will not be able to sell its services for
the price it originally thought it would be able to charge.

27. Technology Risk

Technology risk arises if the market in which the company operates is sensitive to introduction of
new products and technologies or the present technology is not able to produce desired results.

28. Warranty risk (also called as product liability risk)

Warranty risk is the risk associated with negligence with respect to the quality of the
manufactured products. It refers to the risk of having to bear the cost of a claim or return of a

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 Types of risks

defective product. Depending on warranty terms, this cost may have to be incurred through the
repair or replacement of defective products.

29. Quality risk

Quality risk is the risk that arises when the manufactured products/goods are not in accordance
with the agreed terms of the parties.

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