“Managing risk is very different from managing strategy. Risk management focuses on the negative-threats and failures rather than opportunities and successes” — Robert S. Kaplan.
Hello, you are here, to know about the concept of risk and risk management, well, in this article we will try to clear you the concept of risk, types of risks, and risk management processes and approaches with context to businesses and personnel finance.
What is Risk:
Risk is the unexpected loss to anyone or something unfavorable likely to occur due to a specific situation. It’s a measure of the probability that how much the actual results deviate from the expected ones.
Types of Risks:
In a wider sense, we can classify risks in two main categories, which are as under
Systematic risks are those risks that come from external factors, which are directly not in your control but you can manage or reduce the intensity of risk. It is the overall impact of an event on a specific market. It is the uncertainty of the whole market. The main causes of this type of risk are political uncertainty prevailing in the country, any natural catastrophes, and a major economic downturn.
Unsystematic risk is a type of risk that is specific to anyone or anything. You can avoid, control and manage your unsystematic risk. These types of risks arise within you or your organization. Your actions are the main cause of this risk and only you can control, avoid and eliminate the risk.
There are many other types of risks to consider and some of them are as follows.
Business risk; risk involved to your business
Financial risk; the risk associated with your capital structure.
Operational risk; the risk associated with the operations of a company
Competition risk; is a risk from your competitors
Management risk; risk with management decisions
Legal risk; uncertainty about laws
What is Risk Management
Risk management is a continuous process to identify, analyze, evaluate, track and reduce the risks present in anyone or in any business organization. Everyone individuals or organizations small or big are in the practice dealing with risks. Individuals and small business do it in an informal way while large organization does it formally.
No one can avoid all risks, and not all risks will necessarily have a negative outcome. Companies must assess the benefit/risk ratio of an event and define the acceptable level of risk. This assessment can then be used to make decisions.
5 Important Steps to Manage Risks
1 – Identification of Risk:
Identify and describe the potential risk is the first step in risk management. These can be financial risks, operational risks, project, business, and market risks. Risk identification is a very important step in risk management. When you identify and classify the potential risk then it will be very easy for you to handle that.
Identified risks should be recorded in a risk register or document in another format.
2 – Risk Analysis and Assessment
“Opportunity and risk come in pairs”- Bangambiki Habyarimana
It is the second most important step to manage your risk. Once you identified your risk then it needs to be analyzed critically. It is not necessarily that every risk that comes to you has only a negative impact. You can see opportunities in it. You just need to find out and avail the one. You should determine the severity of the risk, potential impact of the risk on you and your organization. Just do a deep analysis that where and what will be affected, how much? You can write down your analysis report and then keep an eye on it to manage it.
3 – Find Alternative Solutions:
Determine the importance of risk through internal audits and risk analysis. You will also have to define the acceptable level of risk as well as the elements to be treated as a priority. It is the systematic process to access the risk by analyzing and evaluating of risk.
Identify the potential ways to treat the risk, adopt the approach to treat the risk which will best suit.
4 – Implement the best solution:
Once you have enlisted all alternative solutions, analyze them and implement the best one to achieve your desire results. Make a proper strategy to implement the solution and make sure you have all the resources.
5 – Monitoring the results:
Risk management is a continuous process; it is no like a one-time projecting that has an end time. So when you have gone through all the risk management processes then your final step will be the monitoring of your outcomes. You will see the results of your implemented strategy, analyze your results and see that have you come up with desired results, if not then see why and what changes are required.
Approaches to Risk Management:
The main approaches to risk management are.
Risk Avoidance: Risk avoidance is about stopping and avoiding any activity that presents a risk.
Risk reduction: Risk reduction involves actions that reduce the likelihood of a risk occurring or the magnitude of its impact
Risk Sharing: Risk sharing occurs when one company transfers the risk to another or shares it with another, For example, a company shares a risk when it outsources manufacturing or customer service to a third party.
Risk Retention: Risk retention occurs when the risks have been assessed and the business agrees to take them. No measures are taken to limit the risks, but it is possible to set up an emergency plan.
Importance of Risk Management
If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business — Gary Cohn
The process of risk management is very important. It gives you awareness about the upcoming opportunities and threats. It will help you to deal with risks to minimizing your all types of losses. Without risk management, you can face heavy losses.
When you identify the potential risks associated with you, then it will be very easy to deal with them. When you manage your risks properly it will provide you the basis to make sound and healthy financial decisions and make sure that you are not at loss.
“The biggest risk is not taking any risk. In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks”— Mark Zuckerberg
Everyone individuals or businesses have risks in their life, one should not afraid of risks.
Risk management is a skill that one has to learn to get succeeded in life. As no pain no gain, if you can’t take any risks you can’t receive any big reward. Just take the risk, understand and manage it. This is the art to exploit the risk.