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Risk and Capital Budgeting

Risk is a vital topic across all sectors of the economy. Insurance and finance companies have largely considered risks in their ventures unlike other institutions in the business environment. Currently, behaviors that exist in the business world are constantly affected by risks. Therefore, the concept of risk and its measurement is necessary for quality results. Risk is the likelihood or probability of a given event occurring.

Risk discussion is not a welcomed subject to human nature since it brings about severe negative outcomes such as diseases, deaths and even disability. For businesses, risk discussions should dominate investment decisions because making profits is the only objective in a competitive business environment. Risk is, therefore, considered the lifeblood required to propel business entities to higher levels of success.

Risk is a dynamic concept that varies from one business entity to another. Due to the scale of operations, the numbers of risks that can affect an entity tend to vary greatly across the world market. However, the type of business also affects the nature of risks that a business entity is exposed to within a given period of time. Businesses can ensure survival only if they proceed with adequate and reliable risk assessment and management strategies. Qualified personnel are needed to perform such assessments.

Risks can bring about huge losses if not detected early enough in a business entity. The number of risks detected can also increase or decrease over time. Reliable risk management strategies are needed to keep such risks to manageable levels. Type of risks need to be identified before thinking about capital budgeting process. Risks that affect businesses include idiosyncratic risk or non-systematic risk and systematic or market risks. In the business world, risky ventures have always been known to have the highest returns.

Finally, during any capital budgeting process, risk assessments and measurements are required to enable complete estimation and resource allocation. Normally the degree of risk is used to determine the amount of funds budgeted for a given project. Risky projects will require services of experts so that they will remain risky but productive (Phillips, n.d).      

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