Risk is one of the major elements in business. It signifies the related and upcoming threats to a business. It means that if you are performing the following activity or function, then what will be the possible consequences that will lead to losses? Risk is an element that can never be eliminated from a business. No matter how many precautions, procedures, or planning you take, where there is business, there is a risk. However, you can minimize the effect of risk by taking appropriate measures. This process of minimizing the effect of risk is called risk management. It is a method of reducing threats that could otherwise result in massive losses for the company.
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What is Risk Management?
Risk management is the process of identifying, recognizing, assessing, measuring, and controlling risks or related threats to an organization. It is simply the process of identifying the risk in a business, assessing the nature of the risk, and taking preventive measures to minimize its effects. It includes all the functions and preventive measures taken to minimize the risk. Also, it takes into consideration all the financial, legal, strategic, and security risks that occur in an organization.
Risk management enables an organization to take into consideration all the aspects of risk. It establishes a relationship between the risks and their impact on the objectives of the organization, thereby preparing the organization in advance for upcoming threats.
Principles of Risk management
Different organizations have different principles governing risk management. It depends upon the type, size, nature, and various other factors that should be the principles regarding risk management. The number of principles, how they will work, how promptly they will be followed, and how rigid or flexible they are, depends on the organization. However, the following are the basic principles of risk management:
Organizational context
This states that various factors in the environment affect the working of an organization such as political factors, social factors, legal factors, technological factors, and societal factors. The more factors there are, the greater the risk that these factors will cause. So, a risk management system should consider all the factors and should be an integral part of the organization.
Involvement of stakeholders
Stakeholders are the owners of the company. They are the actual risk bearers, so risk management should involve their participation at every level. They should be aware of every risk prevailing in the organization and take preventive measures to minimize it. Not even a single decision related to risk can be taken without their involvement.
Organizational objective
A risk management system is designed to deal with risk. But, whenever a risk is considered, the system should also keep in mind the objective of the organization. Any decision or measure taken to minimize risk should be taken after taking into consideration the overall objective of the organization.
Reporting
In a risk management system, there must be a good and continuous flow of communication. Every piece of information should be authenticated and communicated. There must be a proper establishment of a reporting and accountability system.
Roles and responsibilities
A risk management system must be organized with due responsibility and has to be transparent and inclusive. Each person working and contributing to the organization should be capable of performing their roles. Each member should be dynamic, wise, innovative, and responsible enough to carry out their functions.
Support structure
The term “support structure” refers to an organization’s innovative team as well as other members who are capable of dealing with changing situations patiently. Whenever there is a sudden change or risk to be faced, the support structure should be capable enough to face it with due attention and care.
Early warning indicators
There should be a proper establishment of early warning indicators that reflect the occurrence of a risk or threat. The basic purpose of this indicator is to alarm the organization about the risk before it arrives or hits the organization.
Review cycle
There should be the establishment of a proper review cycle in which every activity related to risk management should be reviewed carefully. There should be an assessment of risk, its scope, its cause, and any damage that might occur. There should be a proper observation of any difference that took place.
Continual improvement
This means an organization should be capable enough to improve and enhance its risk management system from time to time. It should be able to create new plans and strategies to combat unknown risks.
Benefits of Risk Management
A risk management system is very beneficial to any organization. It not only helps the organization to predict the risk but also develops various ways to minimize it. Apart from this, it benefits the organization in the following ways:
- It helps in forecasting various factors due to which risks may arise.
- It prepares an organization for unseen and unfortunate events and losses.
- It enables the growth of a company by minimizing risk.
- It helps the company to minimize loss and survive in the competitive world.
- It enables better budgeting of an organization.
- It helps in improving business functions and processes.
Steps In Risk Management
Risk management is a systematic way of analyzing risk, determining its nature, the degree of loss it can cause, and taking preventive measures to minimize it. A good and efficient risk management system must meet the legal, contractual, internal, and social aspects of a business along with the innovations and changes taking place in technology and the external environment. A proper analysis of every aspect is very necessary to make the system work properly.
Risk management is a continuous process that is required from time to time as risk is always present and hidden in business. Also, risk management is not a hit-and-trial method. Rather, it involves a proper system and the functioning of people, processes, and technology in a series of processes.
Identification of risk
Identification of risk is the first and foremost step in the process of risk management. There are various types of risk in business, such as financial risk, compliance and legal risks, cybersecurity risk, operational risk, and reputational risk. It is very important to identify every risk associated with a business. It helps the organization to prepare itself for unseen and unavoidable consequences. If any risk arises due to any reason, the organization will handle it in a better and more approachable way.
Analyzing the risk
Once all the risks are identified, it is important to analyze them carefully to know their scope and the possible damage they can cause to the organization. To know the scope and severity of a risk, it is important to determine how many business functions it is going to affect. Some business risks are more dangerous and they cause the business to come to a standstill, while others are minor ones that do not affect the business process much. This process also helps to find a relationship between the risk and its related factors. This helps the organization to know which risk arises due to which factor.
Evaluation of risk
There are various risks in a business and a business needs to determine which risk is of great importance and which is of less importance. There is no meaning in spending a lot of time on risk, which causes minor changes in the business function. On the contrary, there are some huge risks which even require more attention and time than estimated. So, evaluation makes it easy to categorize the risk based on less important and more important and helps the organization to focus on them accordingly.
Risk treatment
Every risk needs to be treated in such a way that its effects can be minimized as much as possible. Apart from that, the treatment also includes taking all the necessary and preventive measures so that the organization does not suffer heavy losses. For these purposes, the risk of huge concern must be handled cautiously by the experts in that field.
Monitor and review the risk
As we know that risk cannot be eliminated, it is very important to review the risk from time to time and monitor its scope, increasing or decreasing with the outgoing business processes. Risk can change its form and become riskier or less depending on various factors. It might be possible that a risk which was less hazardous before is now more hazardous due to changes in the external environment. So, it is very important to regularly monitor the scope of risk and review its scope frequently.