Risk Management
Risk is a part of our lives and we need to take risks in order to develop and grow.
Risks can be defined as the probability or threat of damage, injury, liability, loss, or any other negative occurrence caused by external or internal vulnerabilities. Management of these risks can be regarded as actions that have to be taken to neutralize the threat and take advantage of opportunities. Risk is involved in every area, from insurance to health and safety, from government to corporate business, from energy to supply chains, from agriculture to nuclear, from military to transportation, from hospitals and airport security, and from housing to environmental or ecological. Risk management involves understanding, analyzing, and learning how to manage risks so that their threats and hazards are minimized. Whether you are a part of a small local business or a multinational corporation, risk management techniques should be incorporated into your business structure to prevent financial distress and maximize your revenue.
Risk assessment is a process used to identify potential threats or hazards and what the impacts would be if the hazard occurs. It determines a quantitative estimate, the magnitude of the potential loss, and a qualitative estimate, the probability that a loss will occur. When a risk is recognized it should lead to action, with the exception of an acceptable risk which is understood and tolerated usually because the cost of implementing an effective countermeasure exceeds the expectation of loss. Measures should be taken to avoid, reduce, accept, or transfer the risk, including data breaches that could be caused by third-party contractors or suppliers. Third-party individuals or groups may be willing to go to great lengths to steal a company’s information and assets. Intense global economic competition, geopolitical uncertainty, and skill shortages increase reliance on third-party contractors and can mean more threats to your business. Successful business strategies rely on balancing risk with anticipated returns to optimize gains. Risk management techniques include risk avoidance, loss control, risk retention and risk transfer. Risk avoidance involves eliminating risk at any cost, such as getting rid of a hazardous product. Loss control or loss prevention involves strategies for safety measures in reducing the frequency of loss to help to reduce the severity and financial impact. Risk retention is financing some or all of the losses yourself. Risk transfer is either covering losses through insurance or asking others to contribute to covering the loss. Risk management techniques can be implemented throughout a business by recruiting persons who help analyze risk strategies and provide an objective viewpoint in multiple business areas. These persons can help review risks involved with decisions and financial strategies from all areas of the business. A business should encourage employees to manage financial risk within their area of expertise by flagging suspicious activities or suggesting areas that need closer supervision. Strong policies and procedures that limit financial risk should be used. These policies should require multiple review levels for financial documents that analyze areas subject to financial fraud and should limit authority for risky procedures, such as who will have access to sensitive financial information and cash management procedures. Technological methods can also be used for routine checks and balances as well as for automated reports and notices of suspicious activity.
Good risk management creates and protects value and ensures the measures are in place to minimize the negative effects and maximize the benefits, as well as preparing for uncertainty. It is part of decision making as it helps to make informed choices and to prioritize actions. Risk management should be based on the best available information for the company and should be responsive to change in order to adjust to new threats and opportunities in the business.