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28MANAGEMENT OF POSSIBLE RISKS AT INDUSTRIAL ENTERPRISES
AYGUN A. ALIYEVA
PhD in Economics, The head of Public Relations Department Institute of Control Systems of Azerbaijan National Academy of Science, Baku
[0000-0003-4660-9324]
Abstract. Industrial enterprises at the present stage requires the development and application of new approaches to and ways of organizing their activities to ensure greater competitiveness and efficiency of production. The success of an enterprise depends on the accurate and timely identification of its risk sources and factors, on the accuracy of assessment offuture risks. Risk classification plays an important role in analyzing the activities of any enterprise. Also Risk management is part of company's management activities aimed at effective economic protection against unforeseen or undesirable threats that could ultimately cause material damage to the company. Risk management of an industrial enterprise show that the risk should be understood to mean an effect of action or inaction, resulting in a real possibility of uncertain outcomes of various kinds, both positive and negative, affecting the financial and economic activity of the enterprise.
Keywords: Industrial enterprises, risk, risk management, efficiency of production, management strategy.
The aim and objectives of the study.
The aim of the study is to explore the principles and methods of risk management of industrial enterprises on the basis of a synthesis of the theory and practice of risk management of industrial enterprises.
To achieve this aim, it is necessary to:
• to define the concept of "risk" as applied to industrial enterprises, to investigate the theoretical aspects of risk management in the industrial enterprise management system;
• to refine the classification of risk types in order to systematize the risks of industrial enterprises;
• to systematize scientific knowledge of the risk factors of industrial enterprises, to review and analyze the main approaches and methods for assessing the risk factors of industrial enterprises.
In the existing literature, the concept of risk, its characteristic elements and features are interpreted in different ways. Discussions in economics resulted in the formation of two theories of risk - classical and neoclassical risk theory. Prominent representatives of the classical theory, Mil and Senior, while studying the entrepreneur's profit, distinguished two elements in its construction: a) share or interest based on invested capital; b) payment related to payment of possible risk. According to this theory, risk is identified with the expectation of losses that may occur as a result of the realization of this or that decision.
The neoclassical theory, which emerged in the 20s and 30s of the 20th century and whose leading representatives are Knight, Marshall and Pigou, is also based on two propositions: an enterprise operating in conditions of uncertainty must be guided by two criteria in its activities: the size of the expected profit and the amount of its possible fluctuations. . According to this theory, the entrepreneur's behavior is determined by the concept of marginal utility. In other words, if it is necessary to choose one of two options of capital investment that provide equal profit, then it is appropriate to choose the option with less fluctuation of profit.
Currently, the neoclassical theory of risk developed by the famous economist Keynes is also known. The essence of Keynes' improvements is that in order to make decisions under conditions of uncertainty, it is necessary to calculate and take into account not only deviations in the expected level of profit, but also the expected level of profit itself. In other words, while hoping for big profits, sometimes you can take risks (Figure 1).
Decision-making on the amount of profit and expected deviations
Figure 1. Economic risk theories and criteria
The listed theories talk about how to quantify risk. Regardless of what is based on the definition of this quantity, risky activity is understood as an activity that takes place in an uncertain situation.
Two functions of risk - stimulating and protective functions are distinguished. The stimulating function has two aspects: constructive and deconstructive.
The first aspect manifests itself when the risk fulfills the role of a specific catalyst during the solution of economic issues. The second aspect is manifested by the fact that decision-making and implementation lead to adventurism with unreasonable risk.
Consistently, the protection function has two aspects - historical - genetic and socio-legal aspects. The content of the first aspect is that people always spontaneously look for forms and means of protection against possible undesirable consequences. The essence of the second aspect is the need to apply the category of legality of risk to economic, labor and criminal legislation.
The stimulating role of readiness for risk can be both constructive (creative) and destructive (destructive).
In the first case, the willingness of the entrepreneur to take risks, his determination to act in uncertain conditions, relying on the factor of will, helps economic activity. Making decisions about where to invest or how to use these available funds can be particularly important. This aspect is characteristic, first of all, for innovation issues and investment projects.
In the second case, voluntary decision-making can lead to adventurous activity, and in this case it should be viewed as unfounded voluntarism.
The role of protecting an entrepreneur operating in uncertain conditions can be interpreted in two ways. It is about the fact that the participants of the economic process have always created and use various forms of protection against undesirable results in their activities. This aspect is practically expressed in the creation of various insurance and need funds, as well as in the insurance of entrepreneurial risks [1].
The state of industrial enterprises at the present stage requires the development and application of new approaches to and ways of organizing their activities to ensure greater competitiveness and efficiency of production.
What makes the activities of industrial enterprises risky is their operation in conditions of uncertainty that cannot be unambiguously determined, calling for the development and implementation of a risk management system for industrial enterprises to ensure their stability and competitiveness.
Increasing changes in the external environment, the global economic crisis, reduced time for making and executing decisions, and intensifying competition place new, higher demands on the industrial enterprise management system.
Therefore, the success of an enterprise depends on the accurate and timely identification of its risk sources and factors, on the accuracy of assessment of future risks and the development and implementation of preventive measures to avoid undesirable effects.
The market environment in which modern industrial enterprises operate is probabilistic and highly uncertain, so the activities of any industrial enterprise are exposed to a large group of risks and are becoming increasingly unstable, volatile, complex and difficult to predict. It is difficult, or rather almost impossible, to avoid risk in industrial activity. Consequently, the priorities of managerial activity are the assessment of possible risk, identification of risk factors, as well as the choice of risk management methods.
Risk should be understood to mean an effect of action or inaction, resulting in a real possibility of uncertain outcomes of various kinds, both positive and negative, affecting the financial and economic activity of the enterprise.
From the above definition, we can identify the following key elements that constitute the essence of the concept of "risk":
1. The possibility of deviation from the set goal for which the chosen alternative was carried out.
2. The probability of achieving the desired result.
3. The lack of confidence in achieving the set goal.
4. The possibility of material, ethical and other losses associated with the implementation of the alternative chosen in conditions of uncertainty.
Risk classification plays an important role in analyzing the activities of any enterprise.
Risk classification for financial and economic activity of an enterprise is shown in Fig.2. It is clear from the figure that depending on the possible risk event, risks can be divided into two large groups: pure and speculative.
Fig. 2 - Risk classification for financial and economic activity of an enterprise
The managerial decision-making process can be affected by certain factors that cannot be influenced. These factors include, for example, tax legislation, natural and geographical conditions, or public morals. Such factors constitute pure risks. Pure risks imply getting a zero or negative result, and include: environmental, political, transport, natural and some commercial risks [2].
Unlike pure risks, speculative risks are fully dependent on competent managerial decisions. Speculative risks are intrinsically uncertain in their manifestation, and their analytical assessments change over time. These risks imply the possibility of both negative and positive results. Speculative risks include financial risks, which in turn are part of credit risks.
Modern industrial enterprises should be able to manage risk situations rather than try to avoid them. The basic rule of financial and economic activity is: "Not to avoid risk, but to foresee it, seeking to reduce it to the lowest possible level." [3].
Risk management is part of company's management activities aimed at effective economic protection against unforeseen or undesirable threats that could ultimately cause material damage to the company. Like any management activity, risk management has its own logical aspect and its own procedure or order of actions. Therefore, risk management can be described as a set of developed solutions aimed at minimizing a wide range of impacts of various accidental or intentional events, which ultimately cause significant material damage to the enterprise [4].
In forming a risk management strategy, the company essentially chooses the best way of maneuvering in order to most effectively conduct its business activities in a risky environment.
The following are the main maneuvering possibilities in risk management: risk prevention; risk avoidance; reduction of time spent in dangerous areas; conscious and unconscious acceptance of risk; redundancy of operations, facilities or resources; reduction of dangerous behavior; reduction of potential and actual losses; risk sharing; risk disaggregation; distribution of exposures in space and time; isolation of dangerous synergies from each other; transfer of risk to other agents; reduction of risk magnitude; exposure reduction.
There is a variety of risk management methods in modern practice. Based on the experience of foreign risk management professionals, one can observe quite clear preferences in the field of risk management. These preferences are primarily due to the specifics of economic development of the state and, consequently, to the groups of risks under study.
Nevertheless, despite the difference in preferences, the process of development of economic relations in many aspects requires the adoption of Western experience; therefore, the process of convergence of risk management approaches is inevitable. Methods of risk resolution are: avoidance, retention, transfer, reduction [5].
Risk avoidance implies the entrepreneur's refusal to engage in the types of operations whose risk significantly exceeds the permissible level. The entrepreneur avoids using working capital in full, tries not to exceed the rate of borrowed capital, etc. In the process of risk avoidance, the enterprise loses part of its profit, so the manager should take a very balanced approach to this method of risk resolution.
Risk retention is a process that leaves the risk up to the investor, i.e., makes it the investor's responsibility. The investor must be sure, when investing venture capital, that if it is lost, they will be able to cover this loss with their own funds. The risk transfer process takes place if the investor decides to transfer the responsibility for the risk to someone else, either an individual or a legal entity, such as an insurance company.
Different techniques are used to reduce the degree of risk at industrial enterprises, the most popular of which are: diversification; acquiring additional information about choices and results; limiting; self-insurance; insurance.
Diversification is the process of allocating invested funds across various assets. These funds are interlinked directly, in order to reduce the degree of risk as well as profit loss. Through diversification, an entrepreneur can avoid part of the risk by allocating capital across a range of activities.
Limiting is the establishment of a limit, i.e., a limit on the amount of expenses, sales, credit, etc. Limiting is the most important method of risk reduction. This method is used by banks when issuing loans, concluding contracts, etc. Businesses also use this method when selling goods on credit, granting a loan or determining the amount of capital investment.
Self-insurance consists in the entrepreneur's decision to insure themselves by putting aside some funds rather than buy insurance from an insurance company, thereby saving on the insurance costs. Self-insurance involves the establishment of in-kind and reserve funds in the economic entities whose activities are exposed to risk.
Self-insurance makes sense when the value of insured property is relatively small compared to the property values of the entire business. It is cost-prohibitive for a large company to insure several pieces of equipment against fire in a small rental premises. If the company owns a large number of one-type property, the likelihood of loss is also very small. For example, mining companies that own several hundred bulldozers practice self-insurance. The benefit is obvious: the loss of one bulldozer per year, which is highly unlikely, will cost the company less than annual premiums for all units of equipment it owns [6].
The essence of insurance is that the investor is willing to give up part of their profits to avoid risk, i.e., they are willing to pay to reduce the risk to zero.
In economy, lengthy periods of project implementation, insufficient investment, low turnover and payback period, relatively low level of economic literacy of administrative and managerial staff hamper objective assessment of the benefits of the strategy to reduce risks in the activities of a modern industrial enterprise. This, in turn, contributes to an inefficient management of financial flows, the lack of forecasts of the results of financial and economic activity, errors in the strategic planning of enterprise development. [7]
Independent study of economic risk assessment and accounting problem is of particular importance as an important component of economic analysis, management theory and practice in
the conditions of market relations. Applying the principle of independent interaction of market subjects, ensuring healthy market competition, uncertainty and risks are unavoidable. In such conditions, it is very difficult to foresee their results and make optimal decisions in the business sphere. In this regard, risk being an objective necessary category in the system of market relations requires improvement of the theory and practice of economic analysis.
At the same time, it should be noted that the absence of undesirable and unexpected risks for companies, banks, enterprises, as a rule, lowers the dynamism and efficiency of the economy. In this regard, the quantitative and qualitative assessment of economic risks, as well as the problem of risk management, is very relevant in terms of the possibility of large losses in the implementation of financial, production, service, innovation, management and other types of activities.
Thus, the results of our study of theoretical aspects of risk management of an industrial enterprise show that the risk should be understood to mean an effect of action or inaction, resulting in a real possibility of uncertain outcomes of various kinds, both positive and negative, affecting the financial and economic activity of the enterprise. At the same time risk management can be described as a set of developed solutions aimed at minimizing a wide range of impacts of various accidental or intentional events, which ultimately cause significant material damage to the enterprise.
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