DOI 10.20544/HORIZONS.A.20.1.17.P36 UDC 334.722 005.52:005.334 658.14/.17(497.11) EXPOSURE TO AND MANAGEMENT OF 94 FINANCIAL RISKS OF YOUNG ENTREPRENEURS Milica, M., Radović PhD, Vladimir, M., Njegomir PhD, Faculty of Low and Business Studies PhD Lazar Vrkatic, Novi Sad The University of Union Contact: [email protected] Abstract Young people from 18 to 35 represent the basic lever of the development of every society. Their self-employment and entrepreneurship are of particular importance for poor countries and the countries in post-transitional period. The entrepreneurship of the young people is permeated by a large number of challenges. The most important challenges are the method of financing and financial risks in business. The research aim of this paper is inquiring of the exposure to financial risks with the aim of their minimization by adequate management. So as to gain the aim that is set in the paper, we are researching the exposure of young entrepreneurs to the financial risks, the sources of finance of young entrepreneurs, theoretical framework of risk management and quantitative approaches to the financial risk management. Keywords: entrepreneurship, financial risks, management, market, young entrepreneurship EXPOSURE TO AND MANAGEMENT OF FINANCIAL RISKS OF YOUNG ENTREPRENEURS The data on proactive social engagement of the young people in Serbia, but also in the countries in the region, are devastating. The young people between 15 and 30 fall under the category of the most unemployed 94 Original scientific article 543 population. In Serbia, according to the data of the Statistical Office of the Republic of Serbia, the young people have got the highest rate of unemployment. According to the research of the position and needs of the young people in Serbia by the Ministry of Youth and Sports the hopelessness of the young people increases, so more than three-fifths of them, mainly highly-educated, believes that there are no prospects in Serbia, while only 10.1% believes that there are.95 By the same research, the data have been obtained that the young people in Serbia see the opportunity abroad (63.5%), and as the greatest problem stands out the problem of unemployment (57.7%). The best way of solving this problem and other social problems is stimulating of the entrepreneurship. However, the entrepreneurship in Serbia, comparatively speaking, is insufficiently present among young people and often hampered by barriers from which the most important are those of financial nature. (Njegomir, 2015). According to Richard Cantillon, the entrepreneurs are individuals that accept the risk and deploy the resources so as to maximize the financial result by using the available options. (Cantillon, 1931) Schumpeter defined the entrepreneurship in the context of development of new products or services, the development of new methods of production, identification of new segments and market, identification of different sources of offer and development of different forms of organizations (Schumpeter, 1934). Entrepreneurship essentially represents the identification of opportunities and the realization of useful ideas into practice (Acs, 2006). The tasks that require such behaviour can be fulfilled individually or in group and usually require creativity, enterprise and readiness for taking risk. EXPOSURE OF THE YOUNG ENTREPRENEURS TO FINANCIAL RISKS Investment in any financial instrument, and/or the form of assets is motivated by the expectation of the investor to achieve a certain yield. The yield, however, can be, but it does not have to be realized, as it can be higher or lower than the expected. The expected yield is not always certain: in other words, the investor faces with the risk that his/her investment will not give the result in accordance with his/her expectations and assumptions which have been the starting point for investment, and/or the circumstances that the investor has taken into consideration while investing. If we call the instability of cash yields the financial risk, then the factors of that risk can be grouped in several categories: market risk, credit risk, 95 The research on the position and needs of the young people, the Ministry of Youth and Sports of the Republic of Serbia, Belgrade, 2013. 544 liquidity risk, operational risk, legal regulatory risk, business risk, strategic risk and the risk of reputation. Market risk represents the changes in market prices and ratio of exchange, which leads to reduction of value of financial assets of the portfolio. Market risk can further be decomposed in its four main forms as follows: risk of interest rate, equity price risk, risk of foreign exchange and risk of changes in commodity prices. Interest-rate risk is the risk that appears when the securities lose their value due to the increasing of market interest rate. Equity price risk is the risk that binds to the instability of the price of common shares and which can be conditioned by the activity of macroeconomic factors (systemic risk) or business of the company (individual risk). Foreign exchange risk is undesirable change of parity of foreign currencies in regard to domestic currency, which can cause significant losses in foreign trade transactions. Commodity price risk is conditioned by the ratio of supply and demand, but also by some other factors such as: the season, type of commodity, way of transport and storage, etc. Credit risk is the risk of change of credit ability of the client (buyer), which can influence on the change of the value of financial assets of the creditor. Forms of this risk are manifested in inability to fulfill payment obligations or inability of fulfilment of the part of the obligation (as a mild form). Liquidity risk implies deterioration or inability of the company to pay off one's obligations or inability to collect one's claims. Operational risk is specific type of financial risk that refers to potential losses of value due to inadequate organization, poor management, wrong control, frauds, thefts and other mistakes. Operational risk implies: internal frauds (false data, stealing), external frauds (robbery), inadequate engagement of the employed (false sick leave), improper relationship with the clients, damages due to force majeure, technical problems (power cut, failure of telecommunications connections), executive problems (wrong data, incomplete documentation and the like.). Legal and regulatory risk is the name for the risks connected to disregard or change of legal norms. Typical example is the conclusion of illegal business agreements, long litigations with the aim of non-performance of the contractual obligations or the changes of tax laws. Business risk implies overcoming of uncertainty concerning the movement of market demand, overcoming of optimal level of market prices, the costs of production, storage and delivery of goods and other. Under strategic risk we imply the risk of large investments where there is the risk concerning success and profitability. New dimension of risk is the 545 reputation risk that has become important after great accounting scandals at the end of twentieth century (Enron, Parmalat). THE SOURCES OF FINANCIAL RESOURCES OF YOUNG ENTREPRENEURS The researches in Serbia show that the entrepreneurs from non-bank sources of financing mostly use state aid (70%), then micro financing by non-bank entities (11.7%), help of friends and family (10%), business angels (5%) and lastly, the risk capital (3.3%). In the following presentations, we point to the most important sources of finance. Firstly, one’s own sources of finance are considered and then the external that can be on the commercial basis or of the state. (Erić, 2012) The most important sources are individual savings and the savings of family and friends. It is about the property that the owner or the owners possess before the beginning of the business. Investing of one's own savings, the personal property of the owner turns into the founding capital of the business entity. The owner's own resources and of his/her families are usually permanently connected to business of the business entity. The return of invested capital in the form of founding capital is possible only under the condition that there comes to the bankruptcy of business entity and while bankruptcy after the payout of all the creditors. However, this does not mean that the owners will not restore the invested capital in indirect way through the earnings from the business of business entity. The owner’s own resources and of his/her families have got a number of advantages, but also the disadvantages. These advantages include absence of dependence on investors, minimizing the indebtedness and increasing one's own solvency and increasing the credit ability. If there are more owners, the dispersion of risk is realized except additional capital of course, with the price of losing exclusive property. The greatest disadvantages of using one's own resources are opportunity costs, and/or the costs of the lost chance that the owner with his/her own resources realizes higher yield by alternative investment in bank or other business venture, as well as the limitation of these resources for complete growth and the development of business entity. Table 1: The sources of finance of small and medium-sized enterprises by the stages of life circle. Type The initial The phase of The phase of SME phase growth maturity 546 • individual • factoring, • undistributed savings, • leasing, profit, The • equity in • commercial • bank loans enterprise real estate, loans, s with • savings of • bank loans small family and potential friends, for growth • state aid, • loans of commercial banks • individual • risk capitalists, • corporations, The savings, • private offering • bank loans, enterprise • the savings of shares, • bond funds with s with of family • public offering high yield, moderate and friends, of shares, • pension funds, potential • business • bank loans, • initial public for growth angels, • corporate offering of and the • risk investments shares enterprise capitalists, s with the • corporate potential investment for rapid s growth Source: Erić, D.D.