Risk Management
Risk management is a vital part of planning for any business expansion or change. It is intended to minimize if not totally eliminate events that might give negative impact on a business. A sensible risk management process involves precise identification, careful evaluation and prioritization of all elements involved. Whatever the nature of your business, a good risk management plan is necessary in order to make consistent and sound decision on how to implement your business plans.
According to Wikipedia:
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 eventsor to maximize the realization of opportunities.
Extensive internal knowledge of the business is essential in this part of the process. After determining what could go wrong, i.e. the risks are identified, these are quantified and evaluated. Quantification and evaluation is needed to know the consequence and impact of a certain risk to the company. In quantifying risks the probablility that something could go wrong is multiplied by the cost that would be incurred if that event were to happen. Thus the highest risk events are defined as those that would be more likely to happen and cost high dollars to fix. While the least risky events would be low cost unlikely events.The exposure to a particular risk and whatever it may cause determines the weight of its implications. The types of risks must be categorized and prioritized. There are common risks such as industrial accidents and natural disasters; legal risks and financial risks all of which directly impinge the business albeit to different extents. They should be prioritized and addressed based on their “riskiness”.
The Purpose of Risk Management
The risk management process is designed to shield and protect businesses from vulnerablity due to everything from earthquakes or floods, to terrorist attacks or bad publicity. Financial risk is commonly the main focus of this process and this is necessary in order to protect the employees, as well as your customers and the interest of the general public. Nobody can tell the gravity of a possible chain reaction and domino effect so every risk must be addressed with a plan to minimize its impact. An effective risk management practice preserves not only the integrity of the business and its owners but also the general well being of all the people and physical facilities/assets involved in the business.
Different Approaches in Managing Risks
A well laid-out risk management plan is crucial in maintaining a successful business. A risk can be accepted, modified and given fund allocation to cover for any consequences it may cause. One common method of risk management is through external assistance such as acquiring services of an insurance company. Systematic accounting and reconciliation of internal transactions and proper documentations are on the other hand one of the best ways to manage financial risks. Other forms of risk management might be off-site storage of key computer data and/or redundant servers.
In every risk management process, there should always be a strategy development for effective implementation to minimize the company’s exposure to risks. Planning and strategy are always the keywords in winning a battle. Planning ahead and knowing how and when to execute it can ensure successful risk management in trading. Success usually comes to those who are willing to take calculated risks but successful businesses only take risks when the odds are in their favor and they have a “Plan B” and perhaps even a “Plan C and D”.
See Also:
- Why Businesses Should Retain Older Workers
- Payroll Systems for Small Businesses
- Trends in Business Accounting
- Simple Steps to Improving Employee Productivity
Photo Credits: By Joe Shlabotnik “Lake Melville”
