What is Risk?
Risk is Exposure to the possibility of loss, injury, or other adverse or unwelcome
circumstance; chance or situation involving such a possibility.
Risk is inherent in every business, organizations and entrepreneurship need to
be willing to take risk as without risk there can be no meaningful gain. Like stress, one
has to live with risk and it cannot be avoided. At best risk can be managed or mitigated.
It a probability that some future event could adversely impact the organization.
Risk measured in terms of probability and impact.
Two Classification Risk
Systematic Risk
It is not fully uncontrollable by the organization.
It is not entirely predictable.
It is usually of a macro nature
It usually affects a large number of organizations operating under a similar
stream.
It cannot fully be assessed and anticipated in advance in terms of timing and
gravity.
The example of such type of risk is Interest Rate Risk, Market Risk, Purchasing
Power Risk.
Unsystematic Risk
It is usually controllable by an organization.
It is reasonably predictable.
It is normally micro in nature.
If not managed it directly affects the individual organization first.
It can usually be assessed well in advance with reasonable effort and risk
mitigation can be planned with proper understanding and risk assessment
techniques.
The example of risk is Compliance Risk, Credit Risk, Operational Risk.
Risk Management Process Definition
In business, risk management is defined as the process of identifying, monitoring
and managing potential risks in order to minimize the negative impact they may have on
an organization. An effective risk management process will help identify which risks
pose the biggest threat to an organization and provide guidelines for handling them.
The 3 Steps of Risk Management
The risk management process consists of three parts: risk assessment and
analysis, risk evaluation and risk treatment.
1. Risk Assessment & Analysis
The first step of the risk management process is called the risk assessment and
analysis stage. A risk assessment evaluates an organization’s exposure to uncertain
events that could impact its day-to-day operations and estimates the damage those
events could have on an organization’s revenue and reputation.
Effectively assessing and analyzing an organization’s risks helps protect assets,
improve decision making and optimize operational efficiency across the board to save
money, time, and resources.
2. Risk Evaluation
After the risk assessment/analysis has been completed, a risk evaluation should
take place. A risk evaluation compares estimated risks against risk criteria that the
organization has already established. Risk criteria can include associated costs and
benefits, socio-economic factors, legal requirements, and system malfunctions.
3. Risk Treatment & Response
The last step in the risk management process is risk treatment and response.
Risk treatment is the implementation of policies and procedures that will help avoid or
minimize risks. Risk treatment also extends to risk transfer and risk financing.
It is important to note that risk management is an ongoing process and does not
end once risks have been identified and mitigated. An organization’s risk management