What is Risk Management?
Risk management encompasses the identification, analysis, and response to
risk factors that form part of the life of a business. Effective risk management
means attempting to control, as much as possible, future outcomes by acting
proactively rather than reactively. Therefore, effective risk management offers
the potential to reduce both the possibility of a risk occurring and its potential
impact.
Risk Management Structures
Risk management structures are tailored to do more than just point out
existing risks. A good risk management structure should also calculate the
uncertainties and predict their influence on a business. Consequently, the
result is a choice between accepting risks or rejecting them. Acceptance or
rejection of risks is dependent on the tolerance levels that a business has
already defined for itself.
If a business sets up risk management as a disciplined and continuous process
for the purpose of identifying and resolving risks, then the risk management
structures can be used to support other risk mitigation systems. They include
planning, organization, cost control, and budgeting. In such a case, the
business will not usually experience many surprises, because the focus is on
proactive risk management.
Response to Risks
Response to risks usually takes one of the following forms:
Avoidance: A business strives to eliminate a particular risk by getting rid of its
cause.
Mitigation: Decreasing the projected financial value associated with a risk by
lowering the possibility of the occurrence of the risk.
Acceptance: In some cases, a business may be forced to accept a risk. This
option is possible if a business entity develops contingencies to mitigate the
impact of the risk, should it occur.
Importance of Risk Management
Risk management is an important process because it empowers a business
with the necessary tools so that it can adequately identify and deal with
potential risks. Once a risk has been identified, it is then easy to mitigate it. In
addition, risk management provides a business with a basis upon which it can
undertake sound decision-making.
For a business, assessment and management of risks is the best way to
prepare for eventualities that may come in the way of progress and growth.
When a business evaluates its plan for handling potential threats and then
develops structures to address them, it improves its odds of becoming a
successful entity.
In addition, progressive risk management ensures risks of a high priority are
dealt with as aggressively as possible. Moreover, the management will have
the necessary information that they can use to make informed decisions and
ensure that the business remains profitable.
Risk Analysis Process
Risk analysis is a qualitative problem-solving approach that uses various tools
of assessment to work out and rank risks for the purpose of assessing and
resolving them. Here is the risk analysis process:
1. Identify existing risks
Risk identification mainly involves brainstorming. A business gathers its
employees together so that they can review all the various sources of risk. The
next step is to arrange all the identified risks in order of priority. Because it is
not possible to mitigate all existing risks, prioritization ensures that those risks
that can affect a business significantly are dealt with more urgently.
2. Assess the risks
In many cases, problem resolution involves identifying the problem and then
finding an appropriate solution. However, prior to figuring out how best to
handle risks, a business should locate the cause of the risks by asking the
question, “What caused such a risk and how could it influence the business?”
3. Develop an appropriate response
Once a business entity is set on assessing likely remedies to mitigate identified
risks and prevent their recurrence, it needs to ask the following questions:
What measures can be taken to prevent the identified risk from recurring? In
addition, what is the best thing to do if it does recur?
4. Develop preventive mechanisms for identified risks
Here, the ideas that were found to be useful in mitigating risks are developed
into a number of tasks and then into contingency plans that can be deployed
in the future. If risks occur, the plans can be put to action.