What is Risk Management and Why is it Important in Any Business?

The uncertain economic times of the past few months have had a major effect on how companies operate these days. Companies that used to operate smoothly with the help of forecasts and projections now refrain from making business judgements that are set in stone. Now, companies have a renewed focus: to manage risk.

This article from luminablog.co.uk will show you what risk management is and why you should incorporate it into your business.

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.

Every business and organization face the risk of unexpected, harmful events that can cost the company money or cause it to permanently close. For example, if a business requires funds to continue its operation, it will take a loan. However, proper risk management will mean reading up short term loans reviews to know which one favors the company the most in terms of interests, etc.

Importance of Risk Management

By implementing a risk management plan and considering the various potential risks or events before they occur, an organization can save money and protect their future. This is because a robust risk management plan will help a company establish procedures to avoid potential threats, minimize their impact should they occur and cope with the results.

This ability to understand and control risk enables organizations to be more confident in their business decisions. Furthermore, strong corporate governance principles that focus specifically on risk management can help a company reach their goals.

Other important benefits of risk management include:

  • Creates a safe and secure work environment for all staff and customers.
  • Increases the stability of business operations while also decreasing legal liability.
  • Provides protection from events that are detrimental to both the company and the environment.
  • Protects all involved people and assets from potential harm.
  • Helps establish the organization’s insurance needs in order to save on unnecessary premiums.

Risk Management Strategies and Processes

All risk management plans follow the same steps that combine to make up the overall risk management process:

  • Establish context: Understand the circumstances in which the rest of the process will take place. The criteria that will be used to evaluate risk should also be established and the structure of the analysis should be defined.
  • Risk identification: The company identifies and defines potential risks that may negatively influence a specific company process or project.
  • Risk analysis: Once specific types of risk are identified, the company then determines the odds of them occurring, as well as their consequences. The goal of risk analysis is to further understand each specific instance of risk, and how it could influence the company’s projects and objectives.
  • Risk assessment and evaluation: The risk is then further evaluated after determining the risk’s overall likelihood of occurrence combined with its overall consequence. The company can then make decisions on whether the risk is acceptable and whether the company is willing to take it on based on its risk appetite.
  • Risk mitigation: During this step, companies assess their highest-ranked risks and develop a plan to alleviate them using specific risk controls. These plans include risk mitigation processes, risk prevention tactics and contingency plans in the event the risk comes to fruition.
  • Risk monitoring: Part of the mitigation plan includes following up on both the risks and the overall plan to continuously monitor and track new and existing risks. The overall risk management process should also be reviewed and updated accordingly.
  • Communicate and consult: Internal and external shareholders should be included in communication and consultation at each appropriate step of the risk management process and in regards to the process as a whole.