**2. The risks identification at the level of economic entities**

Any firm bases their activity on two major coordinates: satisfying consumer requests and maximizing the obtained profitability. In order to achieve these goals, it is imposed primarily, a sizing of the capital necessary and identifying the funding opportunities. The object of the financing decision is realized by the selection of the sources of capital at the lowest cost for obtaining them in terms of risk reduction. So, developing a financial policy aimed at determining the financing needs for a period of time, selecting a financing structure, meaning a way of funding through its own resources or loans, and establishing the ratio between short-term use of resources or long term. But, all these issues require the identification of potential risks and establishing a strategy which allows reducing or even avoiding their effects.

Before performing a risk analysis, a differentiation between the concepts of risk and incertitude is necessary [2]. The unanimous opinion is that both regard essential categories that affect the general policy of a firm, but, often it has been made confusion between them, putting the sign of equality. In reality, the two concepts are different and proper understanding. The theoretical and practical approach of the two concepts has suffered

many changes due to the more accentuated degree of complexity of the worldwide economy, relations in social area, technological area, economic crisis event, diversification of financial instruments, etc.

Risk Management in Business – The Foundation of Performance in Economic Organizations 231

possibilities of choice make future being uncertain also for who realizes the strictest planning [4]. As a result, it is much closer to reality an acceptance of the uncertainty and maintenance of it in reasonable limits. A study made on a sample of 50 countries has highlighted important differences in the attitude regarding the avoidance of uncertainty, explained by differences of economic conjuncture, but also cultural, educational or behavioral [5]. Clearly, scientific investigation pointed the reduction of uncertainty at different components and behaviors of human mind. But, the activity of people has caused the action of some new uncertainties so that economic and financial crisis, poverty or globalization accompanies us permanently on the evolution scale of the whole society.

The more and more frequent occurrence of unpredicted events has caused a high interest for researches in the field of risk identification, quantification and prevention at microeconomic level. Therefore, ever since 1955, the professor Wayne Snider had defined the concept of risk manager, and in 1956 the concept of risk management appeared. On this background, risk management has known a fast development, being defined also the concept of *global cost of risk.* The definitions given to risk management have either empirical character("the art of making the right choice, an art based rather on anticipating future events than on the reaction to past ones" ,- or "risk management is just common sense") or pragmatic character ("the management of global cost of insurable or non-insurable risks, in a company" – [6]).

Although the concept of risk itself expresses a state of uncertainty and indeterminacy, however, it must be made a distinction of it, starting from the reasoning that we can act for the purposes of identifying opportunities for expressing some options, not only favorable but also unfavorable, and also of the degree of likelihood. In the market economy frame, the concept of risk has been widely debated, without existing uniform opinions, but rather

If we consider the definition of the explanatory dictionary of Romanian language, respectively:" The possibility of reaching a danger, of having to face trouble or harm suffered; Danger possibly more or less predictable", we can depict the side of probability to express a danger which determines the human factors to identify opportunities in order to prevent and mitigate its effects. Into the specialized dictionaries are meet also other definitions of risk such as, "the possibility that a loan or investment to generate a loss ", and "likely future event, whose production may cause some losses". It can be predictable when factors that cause losses can be predicted in advance and unpredictable when determined by fortuitous circumstances". In the classical theory of decision, the risk is considered "**an uncertain element but possible that always appears in the social and human activities** 

From the definitions presented we can depict the conclusion that the risk is an uncertain phenomenon but with a certain degree of probability of event that can cause both losses and the effects which can be removed with difficulty or even at all. The area of risk event is broad, covering both the human side and also the social, political or other nature side. As a result, conscious or unconscious actions exerted on the components of a system can cause expected direct effects, appropriate to the objectives followed, but also the evidence of unwanted direct or indirect adverse effects that the specialty literature defines as risks.

diverse and even contradictory.

**whose effects are damaging and irreversible".** 

The inability of companies to adapt to changes recorded in the external environment with minimal cost can develop into a risk for this. If we refer to this sense, it is clear that any company (even the most profitable ones) is subject to constant risk, being imposed the development of risk management mechanisms to enable a fast referral of the changes recorded but also developing a mechanism of intervention.

A definition of the notion of risk is based on the changes recorded at the profit level compared to the average achieved in the previous years (this can be implemented also to the level of change in future profitability, of revenues to be obtained, of the results recorded). Another manner of approach, illustrates risk as the possibility of producing a fact which has unintended consequences. It is noted that the risk is regarded as the probability of manifestation of an event (possible to predict or not) with negative implications on the economic activity of a company.

Whatever the way of approaching the concept of risk we observe that it transforms the potential losses according to the probabilities of their manifestation, which are known or determined.

Instead, uncertainty implies inability to estimate those probabilities. It can be considered that the uncertainty is similar to a variable that cannot be defined fully as you cannot identify or predict possible events and neither the probability of their occurrence. In other words, uncertainty is present in the fact that it is not known which of the situations will intervene."[3]

In presenting these concepts it can be observed that the risk results from uncertainty. Thus, the inability to estimate an event to occur, of the time of registration and the size of the effects recorded materializes the state of uncertainty. Following, the adoption of decisions today determines the registration of results in the future, these being subject to a state of uncertainty.

At the level of an economic organization, uncertainty is similar with the risks that cannot be identified and estimated. So, any increase of their weight in the total of risks which affect the activity that takes place determine an increase of the uncertainty state and reverse (knowing and anticipating almost fully the risks involved in the activity that takes place is not similar with the elimination of uncertainty). Uncertainty is seen by the manager as the total amount of the consequences of the existence of some potential undesired situations. As a result, the objective or subjective character of uncertainty is reported to the necessity of correlating the opinions and perceptions of the decision maker with logical argument, based on real dates recorded in the previous period.

Obviously, no one can say that he proposed to avoid the uncertainty state, because, as it has been specified, the profound transformations that affect the entire world have such an accentuated dynamic as it would be utopian such an attitude. The bigger and bigger possibilities of choice make future being uncertain also for who realizes the strictest planning [4]. As a result, it is much closer to reality an acceptance of the uncertainty and maintenance of it in reasonable limits. A study made on a sample of 50 countries has highlighted important differences in the attitude regarding the avoidance of uncertainty, explained by differences of economic conjuncture, but also cultural, educational or behavioral [5]. Clearly, scientific investigation pointed the reduction of uncertainty at different components and behaviors of human mind. But, the activity of people has caused the action of some new uncertainties so that economic and financial crisis, poverty or globalization accompanies us permanently on the evolution scale of the whole society.

230 Risk Management – Current Issues and Challenges

recorded but also developing a mechanism of intervention.

financial instruments, etc.

economic activity of a company.

recorded in the previous period.

determined.

intervene."[3]

uncertainty.

many changes due to the more accentuated degree of complexity of the worldwide economy, relations in social area, technological area, economic crisis event, diversification of

The inability of companies to adapt to changes recorded in the external environment with minimal cost can develop into a risk for this. If we refer to this sense, it is clear that any company (even the most profitable ones) is subject to constant risk, being imposed the development of risk management mechanisms to enable a fast referral of the changes

A definition of the notion of risk is based on the changes recorded at the profit level compared to the average achieved in the previous years (this can be implemented also to the level of change in future profitability, of revenues to be obtained, of the results recorded). Another manner of approach, illustrates risk as the possibility of producing a fact which has unintended consequences. It is noted that the risk is regarded as the probability of manifestation of an event (possible to predict or not) with negative implications on the

Whatever the way of approaching the concept of risk we observe that it transforms the potential losses according to the probabilities of their manifestation, which are known or

Instead, uncertainty implies inability to estimate those probabilities. It can be considered that the uncertainty is similar to a variable that cannot be defined fully as you cannot identify or predict possible events and neither the probability of their occurrence. In other words, uncertainty is present in the fact that it is not known which of the situations will

In presenting these concepts it can be observed that the risk results from uncertainty. Thus, the inability to estimate an event to occur, of the time of registration and the size of the effects recorded materializes the state of uncertainty. Following, the adoption of decisions today determines the registration of results in the future, these being subject to a state of

At the level of an economic organization, uncertainty is similar with the risks that cannot be identified and estimated. So, any increase of their weight in the total of risks which affect the activity that takes place determine an increase of the uncertainty state and reverse (knowing and anticipating almost fully the risks involved in the activity that takes place is not similar with the elimination of uncertainty). Uncertainty is seen by the manager as the total amount of the consequences of the existence of some potential undesired situations. As a result, the objective or subjective character of uncertainty is reported to the necessity of correlating the opinions and perceptions of the decision maker with logical argument, based on real dates

Obviously, no one can say that he proposed to avoid the uncertainty state, because, as it has been specified, the profound transformations that affect the entire world have such an accentuated dynamic as it would be utopian such an attitude. The bigger and bigger The more and more frequent occurrence of unpredicted events has caused a high interest for researches in the field of risk identification, quantification and prevention at microeconomic level. Therefore, ever since 1955, the professor Wayne Snider had defined the concept of risk manager, and in 1956 the concept of risk management appeared. On this background, risk management has known a fast development, being defined also the concept of *global cost of risk.* The definitions given to risk management have either empirical character("the art of making the right choice, an art based rather on anticipating future events than on the reaction to past ones" ,- or "risk management is just common sense") or pragmatic character ("the management of global cost of insurable or non-insurable risks, in a company" – [6]).

Although the concept of risk itself expresses a state of uncertainty and indeterminacy, however, it must be made a distinction of it, starting from the reasoning that we can act for the purposes of identifying opportunities for expressing some options, not only favorable but also unfavorable, and also of the degree of likelihood. In the market economy frame, the concept of risk has been widely debated, without existing uniform opinions, but rather diverse and even contradictory.

If we consider the definition of the explanatory dictionary of Romanian language, respectively:" The possibility of reaching a danger, of having to face trouble or harm suffered; Danger possibly more or less predictable", we can depict the side of probability to express a danger which determines the human factors to identify opportunities in order to prevent and mitigate its effects. Into the specialized dictionaries are meet also other definitions of risk such as, "the possibility that a loan or investment to generate a loss ", and "likely future event, whose production may cause some losses". It can be predictable when factors that cause losses can be predicted in advance and unpredictable when determined by fortuitous circumstances". In the classical theory of decision, the risk is considered "**an uncertain element but possible that always appears in the social and human activities whose effects are damaging and irreversible".** 

From the definitions presented we can depict the conclusion that the risk is an uncertain phenomenon but with a certain degree of probability of event that can cause both losses and the effects which can be removed with difficulty or even at all. The area of risk event is broad, covering both the human side and also the social, political or other nature side. As a result, conscious or unconscious actions exerted on the components of a system can cause expected direct effects, appropriate to the objectives followed, but also the evidence of unwanted direct or indirect adverse effects that the specialty literature defines as risks.

Among the economic agents, there is a wide range of risks arising both from their actions and from the external environment. The development of the society has created new forms of risk and imposed the identification of new strategies and methods for forecasting and analysis of risk and uncertainty. Thus, to the risks caused by natural disasters, the ones related to economic processes and phenomena, armed conflicts, etc., were added also other categories that are often difficult to define or to estimate quantitatively. Thus, there is growing evidence of risks caused by increasing complexity of the business environment, changes in legal systems (especially for harmonization with other legal systems), conducting business in different countries which experience different rates of economic development, the action of political, demographic, cultural, juridical factors.

Risk Management in Business – The Foundation of Performance in Economic Organizations 233

exercising an active risk management can only have favorable effects at the level of economic operators. The structure of such a process can be highlighted schematically like

The activity performed by a company is subject to different possibilities of manifestation of the internal risks and of the external ones, generated by the interaction with the environment. As a consequence, the first stage imposes the identification of different risks their notation in a "register of risks". Their analysis implies an evaluation and ranking process according to the effects they can generate. The elaboration of an action plan, with clear action measures, for avoiding risks and reducing the losses caused by their manifestation is the next mandatory step. But, there not enough these actions without a permanent verification of the risk management process and performing a rigorous control over the way the corresponding measures are applies so that they record an improvement of

Can it be estimated and avoided the risk only by using the manager's intuition? The answer is clear, demonstrated by daily realities. An inherent aspect of any activity is the possibility of existence of a not desired event, for which it would be ideal at least determining the probability of manifestation. To the possibility of manifestation of a situation, process, phenomenon, etc. it can be associated an interval or one or more concrete answers. In the probabilities theory, these elements are defined as discrete random variables (the ones for which there can be enumerated the results) and continuous ones (those for which there can be placed the results in certain intervals).In practice, there can be also used mixed variables, which report to the possibility of using a combination of the two types mentioned previously for reflecting the possible results (these are specific to the insurance sector).

this (Figure 1).

**Figure 1.** Structure of risk management process

**3. Theory of probabilities in risk review** 

the company's performance.

The group of risks can be realized from more points of view, in the specialty literature being meet many approaches. Without planning to repeat them, we shall try to report especially at those typologies that put in light categories which execute a big influence on the economicfinancial performance of the economic organizations (table 1).


**Table 1.** Classification criteria of risks that affect the activity of economic entities

The risks specified can be deducted at their turn on subcomponents and they allow an analysis of generator causes. No matter the classification criterion and the possibility of dividing, one thing is for sure: the risk in business is a certain state, a feature of market economy. Its inexistence could lead to methods of performing the activity by the economic entities not according to the economy realities (practically, this thing would equalize with the existence of some administrative intervention leverages at the level of state that could eliminate freedom of action of the economic operators).

The conclusion of the aspects presented converges in only one way, more exactly that one where there is no probability of performing an activity in a certain environment, of course, no matter the field, branch or sector where an economic agent places his activity. As a result, exercising an active risk management can only have favorable effects at the level of economic operators. The structure of such a process can be highlighted schematically like this (Figure 1).

**Figure 1.** Structure of risk management process

232 Risk Management – Current Issues and Challenges

the action of political, demographic, cultural, juridical factors.

financial performance of the economic organizations (table 1).

**Table 1.** Classification criteria of risks that affect the activity of economic entities

eliminate freedom of action of the economic operators).

The risks specified can be deducted at their turn on subcomponents and they allow an analysis of generator causes. No matter the classification criterion and the possibility of dividing, one thing is for sure: the risk in business is a certain state, a feature of market economy. Its inexistence could lead to methods of performing the activity by the economic entities not according to the economy realities (practically, this thing would equalize with the existence of some administrative intervention leverages at the level of state that could

The conclusion of the aspects presented converges in only one way, more exactly that one where there is no probability of performing an activity in a certain environment, of course, no matter the field, branch or sector where an economic agent places his activity. As a result,

Among the economic agents, there is a wide range of risks arising both from their actions and from the external environment. The development of the society has created new forms of risk and imposed the identification of new strategies and methods for forecasting and analysis of risk and uncertainty. Thus, to the risks caused by natural disasters, the ones related to economic processes and phenomena, armed conflicts, etc., were added also other categories that are often difficult to define or to estimate quantitatively. Thus, there is growing evidence of risks caused by increasing complexity of the business environment, changes in legal systems (especially for harmonization with other legal systems), conducting business in different countries which experience different rates of economic development,

The group of risks can be realized from more points of view, in the specialty literature being meet many approaches. Without planning to repeat them, we shall try to report especially at those typologies that put in light categories which execute a big influence on the economic-

> The activity performed by a company is subject to different possibilities of manifestation of the internal risks and of the external ones, generated by the interaction with the environment. As a consequence, the first stage imposes the identification of different risks their notation in a "register of risks". Their analysis implies an evaluation and ranking process according to the effects they can generate. The elaboration of an action plan, with clear action measures, for avoiding risks and reducing the losses caused by their manifestation is the next mandatory step. But, there not enough these actions without a permanent verification of the risk management process and performing a rigorous control over the way the corresponding measures are applies so that they record an improvement of the company's performance.
