In business, risk is inevitable. It cannot be eliminated but can be forecasted, foreseen, and managed. Your ability to manage risk will affect your profitability in business.
This article will talk about the importance of risk management in every business and the best things to know if you want to manage the risk in your business.
What is Risk?
Risk is the uncertainty of having success or failure in any activity. For example, if you have forecasted to get home in 40 minutes, there is an unavoidable risk that you may get there in 2 hours if you live in a crowded city. This may be due to high traffic levels.
Types of Losses That May Occur As A Result of Risk
Two types of losses may occur as a result of risk:
Expected Losses
Easily predictable losses. These are losses that businesses can make provisions for.
Unexpected Losses
Here, most times, capital is absorbed. Businesses cannot predict to have these kinds of risks. For example, the possibility of getting losses in a sure profitable trade.
What is Risk Management?
The importance of risk management in every business cannot be downplayed. Risk management means being prepared for risks that may occur. It is the management of the uncertainty of objectives whether positive or negatives.
Businesses that engage in good risk management get the best results. Risk management is the process of coordinating resources to meet objectives.
Risk management involves the identification, assessment, and prioritization of risks and then the coordinated and economic application of steps and resources to minimize risks.
Management involves planning, organizing, coordinating, leading, motivating, directing, etc. Management of risks means planning or anticipating risks and coming up with measures to mitigate risks.
A risk manager should be able to look at risk from the angle of negativity and positivity, threats, and opportunities.
Higher risks lead to higher results, therefore, your goal as a risk manager should not be total avoidance of risks, but rather, to utilize them to yield the best results.
Your ability to move through possible threats to get your ultimate results makes you get the best results. Your goal as a risk is to optimize risk–reward trade–off.
How to Identify Risks
- Cash flow analysis helps you see or identify trends that have led to problems in the past and can possibly lead to problems in the future.
- Brainstorming: Looking at factors such as your location, types of customers, etc.
- To identify credit risks, look at the various factors that may not allow your debtors to pay back their debts such as their way of life, spending habits, cash flow of their business, etc.
- Profiling can also help identify credit risks. Knowing trivial details such as family background, responsibilities, religion, place of origin, tribe, position in the family, etc.
- SWOT analysis. Know your strengths, weaknesses, opportunities, and threats. These can help you see your risk and know how to tackle them.
Risk management most times is not done to eliminate risks but to optimize risks to gain competitive advantages. This is because the availability of risks leads to the availability of opportunities.
Goals of Risk Management
The goals of risk management for every business are:
- To make sure that the risk exposure of a company is within the terms or limits prescribed by the business owners.
- To also make sure that risk-taking decisions are in line with the strategies or objectives of the business.
- To ensure that there is enough capital is available to take risks.
- Risk management is done to ensure that there are enough expected payoffs to compensate for risks taken.
Risk Management Levels
Risks management can occur at different levels such as:
- Enterprise level risk
- Division or subsidiary-level risks
- Business unit risks.
Importance of Risk Management
Some of the major importance of Enterprise risk management are:
- With high risks, you can get high returns (profits)
- The decisions gotten by the management of a business can help to create, preserve or erode value.
- Effective risk management can help create value by enabling the management of businesses to: deal with potential future events that create uncertainty; respond to issues that reduce the likelihood of downsides and increase of upsides; identify and manage multiple risks that can control the organization.
Frequently Asked Questions
What are the Key Concepts of Risk Management?
The key concepts of risk management are:
- Risk Appetite definition determination
- Identification of potential events with impact on objectives
- Portfolio view of risks
- Risk assessment and response
- Risk consideration in strategy formulation
- Application across the entity
- Monitoring managing within the defined risk appetite
- Monitoring the performance of ERM
What are the types of Risk Control Activities for Enterprises?
Preventive and detective control activities for enterprises are:
- Approvals
- Segregation of duties
- Physical controls
- Logical controls
- Password management
- Authorization
- Reviews
- Maker/Checker
- Sequential numbering
- Reconciliation
What are the Main Components of Risk Assessment?
The main components of risk assessment are:
- Internal environment
- Event identification
- Risk Assessment
- Risk Response
- Control Activities
- Information and communication
What is Enterprise Risk Management?
Enterprise Risk Management entails a comprehensive and integrated approach to the management of the various risks which an organization faces in the course of doing business in order to maximize the profits of the business.
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