Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, operational failures, projects, legal liabilities, credit risks and natural disasters. There are two types of events which can happen to a business: negative events which are costly and positive events which are beneficial.
The purpose of risk management is to minimize the negative effects of risks and to maximize the positive effects. Risk management is an ongoing process that includes:
Selecting the best response to risks
Implementing the response to risks
Monitoring and reviewing risks
Risk management is important for all businesses, regardless of size or industry. By identifying and assessing risks, businesses can make informed decisions about how to avoid or mitigate them. By monitoring and reviewing risks on an ongoing basis, businesses can adapt their risk management strategies as needed.
There are many different approaches to risk management, but all involve some combination of the above steps. The specific approach used will vary depending on the type of business, the nature of the risks involved, and other factors.
Why is risk management important in business?
Risk management is the process of identifying, assessing and controlling risks arising from operational activities and business processes. It is an important part of an organisation’s strategy for ensuring its long-term success and survival.
There are a number of reasons why risk management is important in business:
1. To protect the organisation’s reputation
Organisations face a range of risks that could damage their reputation. These include financial risks, regulatory risks, reputational risks and operational risks. Risk management helps organisations to identify and assess these risks and put in place controls to mitigate them.
2. To safeguard the organisation’s assets
Organisations have a responsibility to safeguarding their assets. This includes their physical assets, such as buildings and machinery, as well as their intangible assets, such as their brand and reputation. Risk management helps organisations to identify and assess risks to their assets and put in place controls to protect them.
3. To ensure the organisation complies with laws and regulations
Organisations are subject to a range of laws and regulations, which they must comply with. Failure to comply with these can lead to severe penalties, including fines and imprisonment. Risk management helps organisations to identify and assess compliance risks and put in place controls to ensure compliance.
4. To protect the health and safety of employees, customers and other stakeholders
Organisations have a responsibility to protect the health and safety of their employees, customers and other stakeholders. This includes ensuring that their workplace is safe and free from hazards, that their products are safe to use and that their operations do not pose a risk to the environment. Risk management helps organisations to identify and assess health and safety risks and put in place controls to mitigate them.
5. To manage financial risks
Organisations face a range of financial risks, such as market risk, credit risk and liquidity risk. These risks can have a significant impact on the financial performance of the organisation. Risk management helps organisations to identify and assess these risks and put in place controls to mitigate them.
6. To ensure the continuity of the organisation’s operations
Organisations rely on a number of critical operations in order to function effectively. These operations must be able to continue even in the event of disruptions, such as power outages or natural disasters. Risk management helps organisations to identify and assess risks to their critical operations and put in place controls to ensure continuity.
What are the types of risk management?
Risk management is the process of identifying, assessing, and controlling risks arising from operational activities and business decisions. The three types of risk management are: financial risk management, strategic risk management, and operational risk management.
Financial risk management is the process of managing risks that may have an impact on the financial performance of an organization. Financial risks include interest rate risk, foreign exchange risk, credit risk, equity risk, and commodity price risk.
Strategic risk management is the process of identifying and managing risks that could impact the achievement of an organization’s strategic objectives. Strategic risks include market risk, competitive risk, technological risk, and reputational risk.
Operational risk management is the process of identifying and managing risks that could impact the operation of an organization. Operational risks include supply chain disruptions, IT failures, natural disasters, and terrorist attacks.