12
Managing Risk
Back in Business · Strand 2: Understanding Enterprise
3 Learning
Outcomes
Outcomes
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12.1
Outline the challenges and risks associated with enterprise and entrepreneurship
Outline
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OUTLINE
The specification defines this as: give the main points; restrict to essential points of information. A good approach for challenges and risks is to name each clearly, briefly explain what it involves, and where possible show how a business might respond. Avoid overlong descriptions — the verb is outline, not evaluate.
Challenges associated with starting a business
Raising Finance
An entrepreneur may lack the finance needed to start or grow their business. Without a track record, banks may be reluctant to lend. Finance can come from equity (personal savings or selling shares), debt (a bank loan), or crowdfunding (raising small amounts from many people online, e.g. through Kickstarter in exchange for rewards or early products).
A strong business plan is essential to persuade investors or lenders.
+A strong business plan is essential to persuade investors or lenders.
Production Methods
A small business may lack the volume or scale to produce output at a low enough cost to be competitive. Entrepreneurs need to decide on levels of production, automation, staffing, and storage.
If producing a lower volume of unique products, market research is needed to check whether the target market will pay a premium price.
+If producing a lower volume of unique products, market research is needed to check whether the target market will pay a premium price.
Ownership Type
Different business structures (e.g. sole trader or private limited company) have different requirements around risk, control, liability, and tax.
A sole trader is cheapest to set up but has unlimited liability. A private limited company offers limited liability but involves more paperwork, shared control, and corporation tax considerations.
+A sole trader is cheapest to set up but has unlimited liability. A private limited company offers limited liability but involves more paperwork, shared control, and corporation tax considerations.
Marketing and Market Penetration
There can be a high initial cost for advertising a new product when sales are slow at the start. The entrepreneur needs to choose the right medium to reach their target market and ensure they have a clear USP and value proposition.
Without effective marketing, even a good product may struggle to attract customers in a crowded market.
+Without effective marketing, even a good product may struggle to attract customers in a crowded market.
Availability of Location or Staff
Even with a great idea, finding the right location is difficult — especially in cities where rents are high and property is limited. A business may have to settle for less visible premises, which can reduce footfall.
Finding and retaining skilled staff is also difficult. High staff turnover can damage customer service and product quality.
+Finding and retaining skilled staff is also difficult. High staff turnover can damage customer service and product quality.
Types of risk associated with enterprise
Entrepreneurial Risk
Personal and financial risk — losing savings, reputational damage, and stress. Entrepreneurs commit their own money and reputation. If the business fails, the personal consequences can be severe.
+Operational Risk
The business may lack the skills, systems, or processes to manage daily operations effectively. Errors in production, delivery, or customer service can lead to lost revenue and reputational damage.
+Economic Risk
Risks outside of the business's control — such as rising interest rates, high inflation, or a global pandemic. These affect costs, consumer spending, and access to finance, and can make an otherwise sound business unviable.
+Market Risk
New competitors entering the market or aggressive pricing from rivals can reduce sales and market share. A business may be disrupted by a stronger competitor or a new product that makes its own offering less attractive.
+Compliance Risk
The risk of failing to comply with employment laws, tax obligations, health and safety regulations, or data protection requirements. Non-compliance can result in significant fines, legal action, and reputational damage.
+Technological Risk
The threat of disruption from technology failures such as cyberattacks, data breaches, or system outages. A business that relies heavily on digital systems is vulnerable if those systems fail or are compromised.
+Ethical Risk
Reputational damage from unethical suppliers, pollution, false sustainability claims, or poor corporate governance. Even if the business itself acts ethically, being associated with an unethical partner can be damaging.
+12.2
Outline the importance of assessing and managing risks in business
Outline
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OUTLINE
The specification defines this as: give the main points; restrict to essential points of information. A good approach when outlining the importance of risk management is to name the benefit clearly, briefly explain why it matters, and link it to a strategy where possible.
Definition of risk management
Risk Management (definition)
The process of identifying, assessing, and taking steps to reduce or manage risks that could negatively affect the business.
It helps a business make better decisions and reduce potential damage from uncertainty or unexpected events. Businesses use risk management to identify risks, assess their impact, apply strategies, and monitor outcomes over time.
+It helps a business make better decisions and reduce potential damage from uncertainty or unexpected events. Businesses use risk management to identify risks, assess their impact, apply strategies, and monitor outcomes over time.
The four steps in assessing risk
1
Identify the riskBusinesses look at what risks they face — such as a customer getting injured on their premises, a cyberattack, or a key supplier failing. A risk audit can help identify weak spots before they become problems.
2
Assess its impactFor each identified risk, the business decides how serious it is, how likely it is to happen, and what damage it could cause. This helps them prioritise which risks to act on first based on potential financial and reputational consequences.
3
Take action to reduce the riskThis could include training staff, spreading risk through diversification, deciding not to enter a risky market, or taking out insurance. Entrepreneurs cannot eliminate every risk, but they can reduce the likelihood or impact of each one.
4
Monitor and reviewNew risks can develop over time — such as new competitors, technology changes, economic shocks, or global events. Businesses must review their risk management plan regularly to keep it effective.
Four reasons why risk management is important
1. Helps Avoid Costly Mistakes
Assessing risks allows a business to spot potential problems before they happen, acting early to avoid major financial losses, legal issues, or reputational damage.
Strategy applied: Prevention — providing proper training to staff or carrying out regular safety checks can prevent accidents that would otherwise result in serious costs.
+Strategy applied: Prevention — providing proper training to staff or carrying out regular safety checks can prevent accidents that would otherwise result in serious costs.
2. Supports Better Decision-Making
When a business understands the risks involved in a decision, it can choose the best course of action with more confidence — about investments, expansion, staffing, and more.
Strategy applied: Avoidance — a business might decide not to enter a high-risk new market if it doesn't match its current capacity or goals.
+Strategy applied: Avoidance — a business might decide not to enter a high-risk new market if it doesn't match its current capacity or goals.
3. Protects Resources
By managing risks, a business can protect key resources such as money, equipment, data, and staff from being lost or harmed.
Strategy applied: Insurance — taking out policies for property, product liability, and cyber risks ensures the business is financially protected if something goes wrong.
+Strategy applied: Insurance — taking out policies for property, product liability, and cyber risks ensures the business is financially protected if something goes wrong.
4. Improves Financial Sustainability
Businesses that regularly assess and manage risk are more likely to survive over time. They can adapt quickly to economic changes, supply chain disruptions, or unexpected events.
Strategy applied: Spread — not depending on one product, supplier, or market helps the business stay resilient when one area faces difficulty.
+Strategy applied: Spread — not depending on one product, supplier, or market helps the business stay resilient when one area faces difficulty.
12.3
Analyse a range of risk management strategies that can be used to respond to the challenges and risks in business
Analyse
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ANALYSE
The specification defines this as: study or examine something in detail, break down in order to bring out the essential elements or structure; identify parts and relationships, and to interpret information to reach conclusions. A good approach for strategy questions is to name the strategy, explain what it involves, give a real example, and note any limitation or trade-off.
The four risk management strategies
🚫 Avoidance
Identifying a risk and choosing not to engage in the activity at all. A business might decide not to launch in a new market, not to sell a high-risk product, or not to expand until conditions improve.
E.g. A tech company may avoid expanding into China due to compliance and competitive risks.
E.g. A tech company may avoid expanding into China due to compliance and competitive risks.
Limitation: Protects the business but may limit growth opportunities if overused.
◎ Spread
Reducing reliance on a single product, supplier, or market by diversifying across different areas. If one area underperforms, others can support the business.
E.g. M&S are spreading risk by opening M&S Food stores in Applegreen stations rather than depending solely on their own retail outlets.
E.g. M&S are spreading risk by opening M&S Food stores in Applegreen stations rather than depending solely on their own retail outlets.
Limitation: Spreading too thin may cause a business to drift away from its core market or confuse customers about what it stands for.
🛡 Prevention
Taking proactive steps to stop risks from happening in the first place — such as staff training, health and safety checks, security systems, data protection measures, and quality control processes.
E.g. Coca-Cola redesigned parts of its Nashville plant after a flood, raising key equipment to prevent future damage.
E.g. Coca-Cola redesigned parts of its Nashville plant after a flood, raising key equipment to prevent future damage.
Limitation: Requires significant investment of time and money by the business before any risk has materialised.
🔒 Insurance
Paying a premium to an insurance company so that the financial impact of a risk is transferred to the insurer if the risk becomes reality. Insurance does not stop the risk from happening, but it covers the cost.
E.g. Starbucks needs public liability insurance to cover customer injuries in-store, as well as property insurance for fire, vandalism, or flooding.
E.g. Starbucks needs public liability insurance to cover customer injuries in-store, as well as property insurance for fire, vandalism, or flooding.
Limitation: Premiums can be expensive, and not all losses may be fully covered under the terms of the policy.
Types of insurance — what they cover and why they matter
| Type | What it covers | Why it matters |
|---|---|---|
| Public Liability | Covers large payouts if a member of the public injures themselves on the business premises or as a result of the business's activities. | Essential for any business with public-facing premises. Claims can run to hundreds of thousands of euro — without cover the business could face bankruptcy. |
| Employer Liability | Covers payouts if a staff member becomes ill or injured as a result of doing their job. | Required by law in Ireland. Protects the business from potentially large compensation claims from employees. |
| Product Liability | Covers payouts if a faulty or defective product causes harm to a consumer. | Critical for any business that manufactures or sells physical products. One faulty product causing injury could lead to costly legal action. |
| Buildings & Contents | Covers financial loss if premises or their contents are damaged by fire, flooding, storms, or burglary. | Protects the business's physical assets. Without it, a single event like a fire could wipe out the business entirely. |
| Cyber Insurance | Covers the business if it suffers a data breach, cyberattack, or IT-related incident that compromises customer data or disrupts operations. | Increasingly important as cyberattacks become more frequent. Covers recovery costs and legal claims, reducing both financial and reputational damage. |
| Business Interruption | Covers loss of income if a business is forced to close temporarily due to an event like a fire, flood, or pandemic. | Helps the business stay afloat by covering lost revenue and fixed expenses during the closure period. |
| Key Person | Covers the business if a vital staff member dies or can no longer work. | Helps cover the financial impact of losing someone essential to the business's success, such as a founder, lead designer, or key salesperson. |
| Professional Indemnity | Covers the business if a client claims they received poor advice or service that caused them a financial loss. | Essential for service businesses such as consultants, accountants, and advisors. E.g. covers a personal trainer sued for a programme that worsened a client's injury. |
Tap the card to flip it. ✓ if you know it, ✗ to see it again.
Choose a learning outcome to quiz yourself on, or quiz all three at once.
Chapter 12 appeared across all four sample papers. LO 12.1 was examined at HL Paper 2 (challenges of introducing new products) and OL Paper 1 (challenges facing entrepreneurs). LO 12.2 was examined at HL Paper 2 (two reasons to manage risks, Storm Éowyn context). LO 12.3 was examined at HL Paper 1 (discuss four strategies) and OL Paper 2 (three types of insurance for PJ Maher).
12.1
Outline two challenges, apart from inflation, facing entrepreneurs in Ireland
OL Paper 1 · Q5(e)
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Question asked
Outline two challenges, apart from inflation, facing entrepreneurs in Ireland.
Context: Alice is a new entrepreneur developing a business idea.
Context: Alice is a new entrepreneur developing a business idea.
Suggested solution
The following is a suggested approach based on the specification verb and the scenario. It is offered as a study aid, not as a definitive answer.
Raising finance: Accessing start-up finance can be difficult, especially without a proven track record or security to offer lenders. Banks and investors may be reluctant to provide loans or invest in an unproven idea, and personal savings may not be enough to cover all start-up costs. This limits the entrepreneur's ability to invest in stock, equipment, and promotion in the early stages.
Marketing and market penetration: Reaching the target market requires research, planning, and a strong promotional message. New entrepreneurs may lack the experience or budget to build brand awareness effectively. Without a clear USP and a well-planned marketing campaign, it is difficult to attract and retain early customers in a crowded market.
12.1
Discuss two challenges when introducing new products and how to address them
HL Paper 2 · Q1(b)(ii)
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Question asked
Discuss two challenges John and Mark may face when introducing new products, and explain how they can address these challenges.
Context: John and Mark run a food and supplement business and are considering introducing new protein powder products, requiring larger batch production, new marketing, and possibly overseas sourcing.
Context: John and Mark run a food and supplement business and are considering introducing new protein powder products, requiring larger batch production, new marketing, and possibly overseas sourcing.
Suggested solution
The following is a suggested approach based on the specification verb and the scenario. It is offered as a study aid, not as a definitive answer.
Challenge 1 — Accessing finance: Ordering larger batches to lower unit costs requires capital that the business may not have available. If they cannot secure enough funding from a bank, the products may be too expensive to produce competitively.
How to address: Start with smaller production runs to test demand. Apply for alternative finance such as a Microfinance Ireland loan or a Local Enterprise Office grant, or use crowdfunding to raise initial capital while also building market interest.
How to address: Start with smaller production runs to test demand. Apply for alternative finance such as a Microfinance Ireland loan or a Local Enterprise Office grant, or use crowdfunding to raise initial capital while also building market interest.
Challenge 2 — Marketing the new product range: Without experienced marketing staff or a large budget, building awareness of a new product in a crowded fitness supplement market is difficult. Poor launch marketing could result in slow initial sales.
How to address: Hire a marketing specialist on a short-term contract or outsource promotion to a specialist agency. Use social media and influencer partnerships to reach the target market cost-effectively at launch.
How to address: Hire a marketing specialist on a short-term contract or outsource promotion to a specialist agency. Use social media and influencer partnerships to reach the target market cost-effectively at launch.
12.2
Explain two reasons why it is important for a business to manage risks
HL Paper 2 · Q3(a)
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Question asked
Explain two reasons why it is important for a business to manage risks.
Context: Storm Éowyn cost likely to be in hundreds of millions as insurers survey damage. Industry figures have warned of higher insurance premiums due to increased risk if severe weather is to occur more often.
Context: Storm Éowyn cost likely to be in hundreds of millions as insurers survey damage. Industry figures have warned of higher insurance premiums due to increased risk if severe weather is to occur more often.
Suggested solution
The following is a suggested approach based on the specification verb and the scenario. It is offered as a study aid, not as a definitive answer.
Protects resources and reduces financial loss: Effective risk management helps businesses avoid or reduce major losses. For example, taking out insurance such as public liability or business interruption cover (as highlighted by the Storm Éowyn context) ensures the business can recover financially if accidents or disruptions occur. This protects stock, premises, and cashflow from being wiped out by a single unexpected event.
Maintains consistency and prevents disruption: Risk management ensures day-to-day operations can continue smoothly. Using prevention strategies like staff training and quality control reduces the chance of accidents or mistakes. This means customers receive a reliable service, protecting the brand from reputational damage — which can be just as costly as financial losses.
12.3
Discuss four risk management strategies businesses can use to respond to potential risk
HL Paper 1 · Q3(e)
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Question asked
Grant Thornton's recent International Business Report highlights the resilience and adaptability of Irish businesses as they aim to mitigate new and emerging risks. Discuss four risk management strategies that can be used by businesses to respond to potential risk.
Suggested solution
The following is a suggested approach based on the specification verb and the scenario. It is offered as a study aid, not as a definitive answer. The verb is “discuss” — a good approach includes naming the strategy, explaining what it involves, giving a real example, and noting its limitation.
1. Avoidance: Businesses can avoid risks by choosing not to engage in certain activities. For example, a tech company might decide not to expand into China due to compliance and competitive risks. This prevents exposure to risk but could also limit growth opportunities if used too often.
2. Spread: Spreading risk means diversifying products, markets, or sales channels. A clothing retailer might sell both online and in-store so that if one channel underperforms, the other supports income. This reduces dependence on a single source of revenue, but spreading too thin can cause a business to lose its identity.
3. Prevention: Prevention involves taking proactive steps to reduce the chance of risks occurring. A factory might invest in staff training, safety equipment, and quality control systems. These measures minimise accidents, protect staff, and reduce reputational damage, but require upfront investment.
4. Insurance: Insurance transfers the financial burden of certain risks to an insurance company. A bakery might take out public liability or business interruption insurance to cover costs if customers are injured or equipment fails. This provides financial protection and supports continuity, but premiums can be expensive and not all losses may be fully covered.
12.3
Outline three suitable types of insurance PJ should consider for his business
OL Paper 2 · Q1(f)
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Question asked
Insurance is one strategy PJ could use to manage risk. Outline three suitable types of insurance that PJ should consider to protect his business from potential risks.
Context: PJ Maher is an electrical contractor who employs six electricians. He has recently expanded his business by opening a showroom and warehouse, and uses a leased van for deliveries.
Context: PJ Maher is an electrical contractor who employs six electricians. He has recently expanded his business by opening a showroom and warehouse, and uses a leased van for deliveries.
Suggested solution
The following is a suggested approach based on the specification verb and the scenario. It is offered as a study aid, not as a definitive answer.
Public Liability Insurance: Covers the cost if a member of the public is injured on PJ's premises or as a result of his business activities. Given that customers visit the showroom and electricians work in clients' homes, this is essential to protect against potentially large compensation claims.
Employer Liability Insurance: Required by law, this covers compensation claims if one of PJ's six employees is injured or becomes ill as a result of doing their job. Electrical work is a high-risk trade and this cover is essential for any business with employees.
Goods in Transit Insurance: Covers PJ's stock and materials if they are lost, stolen, or damaged while being transported in the delivery van. As PJ delivers electrical materials to customers and other electricians, this protects against financial losses if goods are damaged during delivery.
📌 Know the difference between a challenge and a risk
Challenges are difficulties the entrepreneur faces when starting or running the business — raising finance, choosing ownership type, marketing, finding staff or location. Risks are potential negative events that could harm the business — economic risk, market risk, compliance risk, technological risk. Questions that ask for challenges want the first list; questions that ask for risks want the second. Some questions ask for both — read carefully and give one of each.
📌 The four steps in risk assessment — know them in order
The four steps are: (1) Identify the risk, (2) Assess its impact and likelihood, (3) Take action to reduce it, (4) Monitor and review regularly. The last step is the one most students forget. A good approach for any question asking how a business assesses risk is to mention all four steps, not just the first two. The fact that risks change over time and must be reviewed is an important point.
📌 For strategy questions: name, explain, example, limitation
The verb “discuss” (used in HL Paper 1 for this LO) requires more than naming the four strategies. A good approach is: name the strategy, explain what it involves, give a real Irish or well-known business example, and note its limitation or trade-off. E.g. for Avoidance: “...protects the business but may limit growth opportunities if overused.” Including the limitation is what distinguishes a fuller, more analytical answer.
📌 Insurance questions: match the type to the business scenario
OL Paper 2 asked for three types of insurance for PJ Maher — an electrical contractor with employees, a showroom, and a delivery van. A good approach is to read the scenario carefully and select the types that are most relevant: Employer Liability (employees), Public Liability (showroom/clients' homes), Goods in Transit (van deliveries). Know the four core types by heart: Public Liability, Employer Liability, Product Liability, Buildings & Contents. Then know the extended types: Cyber, Business Interruption, Key Person, Professional Indemnity, Goods in Transit, Fidelity Guarantee.
📌 Risk management importance: link each reason to a strategy
The textbook links each of the four importance points to a specific risk management strategy. Helps avoid costly mistakes → Prevention. Supports better decision-making → Avoidance. Protects resources → Insurance. Improves financial sustainability → Spread. Knowing these links allows you to write a more developed answer for any importance question — you can name the benefit, explain it, and then show how a specific strategy achieves it.
📌 “Discuss” vs “outline” — know the difference in depth required
Outline means give the main points and restrict to essential information. Discuss means offer a considered review with a range of arguments or factors, supported by evidence. For risk management strategies at HL, “discuss” was the verb — which means each strategy needs a named example and ideally its limitation noted. At OL, the insurance question used “outline” — naming the type, what it covers, and why it matters for that specific business is sufficient.
