If you don’t invest in Risk Management, it doesn’t matter what business you are in, you’re in a risky business. The prevalent uncertainties of the current economic scenario have had a ripple effect on how companies operate these days. As the complex and interrelated risks are piling up each passing day, organizations are recognizing risk management as an essential corporate function that facilitates enterprise-wide understanding of risk and encourages commitment to curb down the same.
Companies which once used to operate smoothly with the sole help of forecasts and projections, are now abstaining themselves from making business decisions that are all but set in stone. These companies are thereby shifting their focus and efforts to manage imminent risks.
Risks come in varying shapes and sizes with uncertainty and wariness, causing drastic impact upon an organization’s sustainability in the process. Companies are increasingly laying focus on identifying risks, managing them and eradicating them completely before it can affect their business. At the forefront of defending such risks stands an efficient risk management program. It involves attaining optimum knowledge of risks and harnessing the same to deal with the potential problems.
Effectiveness of a Sound Risk Management System
The resultant outcome of any development intervention of an enterprise are not pre-determined, rather they are highly uncertain. Businesses of all scales face risks of several unexpected events, which include natural calamities, loss due to theft, or damage caused to staff, customers, or visitors on their premises. Any one of these events alone can cost an organization load of money or can even cause an organization to permanently close its operations.
Having an efficient and sound risk management plan can help prepare one to face the unexpected, minimize risks and reduce extra costs before they even occur. By considering the potential risks or proceedings before they even happen and having a risk management plan to tackle with the same, helps an organization to save considerable money and safeguards the organization’s future.
Types of Risk Management
Risks can pop-up from every corner in an organization, due to both internal and external sources. External sources involve those risks which are not under the direct control of the management. These include interest rates, political issues, exchange rates, and so on. Whereas, internal risks include non-compliance of employees or information breaches and several other risks which are within the control of the management.
Risk Management Department
In recent years, various companies have realized this area of concern and subsequently added a risk management department to their team to tackle with the same. This team plays the distinctive role of identifying risks, come up with different strategies to protect an organization from the above risks, to implement the formulated strategies, and finally to encourage all members of the company to cooperate with these strategies.
Drafting an Effective Risk Management Plan
Formulation of a successful risk management system can be both expensive and time-consuming without the backing of an effective plan. An effective risk management plan should be able to identify and address any potential threats or risks. The following points should be covered in such a plan.
- Identification – Identifying the risks that can potentially go wrong in an organization.
- Analyzing – Considering the probability of every potential risk within an organization and analyzing the same to understand its impact.
- Control – Preventing any loss from occurring and recovering the same, in case the loss does occur.
- Treatment – If a company is affected, a plan should be formulated on how they can pay for the compensation.
Aligning the Company Objectives with Risk Management
Larger the organization, larger the risk they generally face; to cope up with that they require risk management strategies that are much more sophisticated. It is the responsibility upon the shoulders of the risk management team to assess each potential risks and determine among them the one’s which are critical for the business. Critical risks include those risks that could have an adversarial impact over the business functioning. These risks are given the most priority and importance as the overall goal of risk management is to enable companies to take the risks which can in the long run help achieve its primary objective while keeping other risks at bay.
Risk Management and the objectives of a firm are inversely related, as without risk management in an organization a firm cannot define its future objectives. In case a company doesn’t take the imminent risks into consideration, the probability of them losing sight of their direction becomes increasingly high.