Systematic and Unsystematic Risks
A company’s activity is always associated with a specific set of potential risks. The term is defined as “the potential of losing something of value,” and there are two categories of risks: systematic, which are associated with the vulnerability to various events that can negatively affect aggregate outcomes, and unsystematic, which are specific to a particular industry or company (Soleimany & Gerveie, 2017, p. 1). The chief risk officer must analyze the environment and identify the areas where the company can be exposed to a certain form of risk. Explaining how systematic and unsystematic risks affect risk planning would require me, as a chief risk officer, to describe the potential dangers associated with business and economics and what damage they can cause to the firm, its employees, revenues, and other aspects.
It is always wise to plan for any risks because, otherwise, the general performance of a firm can suffer, as well as the entire company. For instance, one of the systematic risks is broad market return, which can lead to significant financial losses (Soleimany & Gerveie, 2017). Planning for such a risk would imply predicting when it can occur and avoiding major financial operations until the market is stable again. If a particular wood-cutting firm tends to buy unique materials from a specific supplier who shuts supplies at some point, it will exemplify an unsystematic risk. Another example is the deficiency of forests in the area, which can severely damage the wood-cutting organization. Planning for unsystematic risks requires “assembling a portfolio with significant diversification so that a single event affects only a limited number of assets” (Soleimany & Gerveie, 2017, p. 1). Although it does not imply complete avoidance of damage, the efficient work of a chief risk officer can significantly improve the outcomes.
Venture Capital
There are several advantages and disadvantages associated with venture capital. As a business consultant who works with business owners and is currently working with a new client who wants to start a bakery and seeks my advice, I would first describe the positive and negative sides of using venture capital as start-up funding for a business. The primary advantage of venture capital is targeting innovative development, which can lead to the creation of new technologies and further expand the business (Andrusiv et al., 2020). For instance, innovative technologies applied to the bakery under discussion can turn it into a factory and increase profits. Venture capital also has a significant disadvantage: this form of investment involves high levels of risk, meaning that major investors may not be interested in such a cooperation, and attracting much money to the business from the start will be problematic (Andrusiv et al., 2020). In other words, the use of venture capital implies that the funding of the related business project does not require much money.
The disadvantage described above is not entirely applicable to the case under discussion since starting a bakery is not a major project, and finding the appropriate investment will not be problematic. However, venture financing is associated with implementing a solid marketing strategy since, as mentioned before, this form of investment is risky, meaning that my client will have to think forward to maintain a successful business (Andrusiv et al., 2020). Therefore, I would recommend my client to seek venture capital investment sufficient to start the bakery while paying particular attention to its future marketing strategy.
References
Andrusiv, U., Kinash, I., Cherchata, A., Polyanska, A., Dzoba, O., Tarasova, T., & Lysak, H. (2020). Experience and prospects of innovation development venture capital financing. Management Science Letters, 10(4), 781-788.
Soleimany, A. G., & Gerveie, P. (2017). The impact of managerial overconfidence on systematic and unsystematic risk. Journal of Accounting Advances, 9(1), 1-32.