Risk Management - Overview, Importance and Processes
What is risk management in finance?
Risk management is identifying, assessing, and prioritizing risks or uncertainties followed up by minimizing, monitoring, and controlling the impact of risk realities or enhancing the opportunity potential by applying coordinated and economical resources. Risk management is essential in any business. It lays foresight for returns on investments and projects all potential backlash a company could face by starting a new (or even routine) endeavor.
Before determining the most effective risk management strategy for your situation, there are five steps to take in first assess the risk and best solution.
Identify the risk
Analyze the risk
Once you have identified risks, you can thoroughly analyze the potential effects that each will have on consumer behavior, your company, and other current endeavors.
Evaluate the risk
Now you can assign a ranking quality to the likelihood of each risk’s outcomes. This will help paint a picture of how severely a risk threatens a project or new product. You can also determine the magnitude that each risk potentially carries to destroy or support a new tactic. The magnitude is a combination of the risk likelihood and consequence.
Treat the risk
Since you have a grip on all possible risks and their severity, you can first treat the worst risks. You’ll first want to look at the ways you can reduce the probability of a negative risk and then how to increase the probability of a positive opportunity. At this stage of risk assessment, preventative and contingency should be prepared so that there are no surprises as you move forward with action plans.
Monitor the risk
By now, you know your risks, their likelihood, what will happen if they occur, and how to go about defusing any disaster that arises. What next? Monitor the risks by tracking involved variables and proposed possible threats to chain reactions. As your tracking system identifies changes, calmly treat the rising problem to avoid widespread ripple effects and the triggering of a big risk. This brings us to the next important wave of risk management: treating the risk. There are several ways to treat risk, and they all depend on what type of risks are being treated and how serious those risks repercussions or opportunities are. Let’s take a look at the techniques.
What is a Risk Management Strategy?
It builds in a process for regularly updating and reviewing the assessment based on new developments or actions taken. A risk management strategy can be developed and implemented by even the smallest of groups or projects or built into a complex strategy for a multi-site international organization.
The process of identifying and reviewing the risks that you face is known as risk assessment. By assessing risks, you can be actively aware of where uncertainty surrounding events or outcomes exists and identify steps that can be taken to protect the organization, people, and assets concerned. How this is achieved and the level of detail which is considered can vary between organizations. In many circumstances, where staff or volunteers have a more hands-on role in the organization, the Management Committee may not carry out the risk assessment themselves. There are two aspects to your risk management strategy at work here. First, you have an obligation to report, but the results may not shine favorably on you or your organization’s performance. So be it. Welcome to metrics. Second, you have an obligation to inform management on key risk issues. You need one or more dashboards to track your priorities. As you get comfortable with assembling the data of importance and various means of presentation, using simple applications of Excel or PowerPoint, you will develop ideas for broader and more specific uses.
Example 1:
Implementing a risk management strategy in a small organisation
Lone Fathers Action Group set aside one committee meeting per year to review the major risks faced by the group. One committee member has responsibility for risk management and facilitates the discussion. They ensure that the discussion is documented and use subsequent meetings to check progress against actions are then followed up in subsequent meetings. Every 6 months this committee member reports to the committee on any changes in the levels of risk faced.
Example 2:
Implementing a risk management strategy in a large organisation
In Tree Conservation International, risk management is one of the key responsibilities of the Assistant Director. They provide training for each manager within the organisation to ensure that risk assessment is built into their working practices and to enable them to carry out annual risk assessments of each project, using the organisation's templates. These are then collated by the Assistant Director to enable Senior Managers to discuss and assess the overall risks to the organisation. A prioritised profile of the top 30 risks is then presented to the Management Committee for their consideration to ensure they are happy to accept the risks to the organisation and approve the actions being taken. This process usually takes 2 months. Progress is reviewed after 6 months with a report sent to the Management Committee. Risks are reassessed annually.
"Major risks are those risks which have a high likelihood of occurring and would, if they occurred, have a severe impact on operational performance, achievement of aims and objectives or could damage the reputation of the charity, changing the way management committee members, supporters or beneficiaries might deal with the charity."
Conducting risk assessment
Regardless of who carries it out, a risk assessment should be:
- systematic
- recorded
- regularly reviewed
As a Management Committee, you will want to concern yourself most with identifying and managing major risks.
Best strategies for treating the risk:
Avoidance
In the best-case scenario, you can avoid risk repercussions altogether. But in forfeiting all activity that carries risk, you also forfeit all associated potential returns and opportunity. It is up to you what type of risk activity you want to play with.
Reduction
Risk reduction implements small changes to reduce the weight of both risk and reward post-event. The reduction will require some process and plan manipulation, but it will save your company from a severe loss in the case of a high-risk manifestation.
Sharing
Risk-sharing or transferring redistributes the burden of loss or gain over multiple parties. This could include company members, an outsourced entity, or an insurance policy.
Retention
Risk-retention involves assuming the loss or gain, entirely. This option is best for small risks where the losses can be easily absorbed and made up.
Travel Risk Assessment
The best risk management strategy combines several techniques, including quality insurance coverage, sound risk management procedures and protocols, and expert advice. The travel risk assessment looks at potential risks that employees may encounter while on business travel, the likelihood of those risks occurring, the potential impact those risks may cause the business if it does occur, and the cost of implementing strategies to mitigate, reduce, or eliminate the risks. Risk assessments can be done on two levels—one for general business travel and a second, more comprehensive one for specific travel destinations, especially if the destination is known to be hostile or dangerous. Pretravel intelligence is very important in the second level. You need to be able to evaluate State Department warnings not just of the destination location but also of surrounding areas as a spillover of dangerous activity can occur. Other types of information important to gather at this point would be “the level of political instability, the activity of terrorist organizations, the region’s health hazards and the local emergency medical care, local criminal activity, and driving hazards.” I would add to this any censorship legislation, especially regarding Internet access and social media postings. For example, Facebook is prohibited in China.
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