Risk Management - What You Should Know About it
“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 personal 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 into two main categories, which are as under
Systematic Risks:
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:
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 in your business.
- Financial risk: The risk associated with your capital structure.
- Operational risk: The risk associated with the operations of a company.
- Competition risk: This 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 individual or organization small or big in the practice deals 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:
Identifying and describing 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 managing 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, and the potential impact of the risk on you and your organization. Just do a deep analysis that where and what will be affected, and 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 of accessing the risk by analyzing and evaluating risk.
Identify the potential ways to treat the risk, and adopt the approach to treat the risk which will best suit you.
4 – Implement the Best Solution:
Once you have enlisted all alternative solutions, analyze them and implement the best one to achieve your desired 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 not like a one-time project 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:
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
“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 has risks in their life, and one should not be 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 risk.
Conclusion
“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 has risks in their life, and one should not be 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 risk.
Frequently Asked Questions
Risk management is the process of identifying risks and planning and implementing strategies to control or reduce them.
There are three main components to risk management: Control is the act of avoiding risk or mitigating the effects of risk. Mitigation involves taking actions to lessen the negative impact of risk. Response is the act of dealing with a situation when it has occurred, or is about to occur.
Healthcare institutions must have a clear understanding of the principles and practices of risk management, including risk assessment, risk control, and risk communication. Risk management should also focus on the safety of the patient, the quality of care, the protection of patients’ rights, and compliance with legal and regulatory requirements.
The key elements of risk management are to have an assessment plan and then execute it. The assessment plan should involve identifying the risks, determining the potential impacts, and establishing a plan to deal with them.
A key control in risk management is monitoring. Monitoring is done on a regular basis to ensure the business is meeting established safety standards.
Our behavior is consistent with our risk management culture. For example, we have created policies and procedures that clearly define our expectations of employees and our approach to handling incidents. We provide training on all relevant topics to help employees understand their responsibilities. We monitor performance and provide feedback when an employee fails to meet expectations.
Manage key person risk by putting a policy in place. You need to establish who’s responsible for the company and then establish policies and procedures that cover the risks. It will also help to put together a plan to manage the risk.
A good manager is someone who can get people to work well together and get the job done. They are able to motivate their employees, lead by example, listen to the needs of their staff, and keep everyone on track towards reaching the company’s goals.
Risk management is the process of identifying, evaluating, controlling, and reducing risks to the company. The basic idea is that by taking steps to control or reduce a potential threat, you can lessen the chance of a problem occurring.
