Risk management is the process of identifying, analyzing, and setting up measures to contain or control unexpected challenges. Every business, ranging from the large manufacturer to the little store owner is faced with challenges like insurance, accidents, losses, and risks in general.
These unexpected events can plunge the organization into unplanned expenses and in some extreme cases, cause the closure of the organization. For this reason, proper risk management and liability control are crucial for the success of any organization.
Why Is Risk Management Important?
Risk management is important for several reasons. Some of these reasons include:
- Firstly, risk management measures have proven valuable in preparing organizations to avoid, identify and handle possible risks that may occur. These measures help to provide valuable information needed to make accurate decisions regarding those risks.
- Additionally, proper risk management measures, prevent and reduce unwanted expenses that could arise. This helps the organization channel its funds into other purposes like proper management of the company.
- Lastly, adequate risk management protects companies and organizations from adverse incidents that could arise. Also, this includes the company’s assets, personnel, and even finance.
A view of possible threats with measures in place to avert or control them serves as a confidence boost for organizations. In conclusion, this will help in the stability of operations for the organization.
Types of Risk
Indeed, there are various risks and threats that an organization may encounter. Broadly speaking, risks can be classified into three types. They are business risk, non-business risk, and financial risk. Let’s delve in further to understand these risks.
These are risks that can affect the profits, sales, and revenues of an organization directly. Plus, it can be seen as the decisions organizations make to maximize profits like a high cost of production given more sales and profits.
Here, the risks are not directly affected or caused by the operations of the business or organizations. Moreover, these risks are external risk factors and are usually out of the control of the organization.
This is the risk of firms losing money. Financial risk arises as a result of losses and instability in the finance market which is caused by fluctuations in currencies, interest rate, stock prices, and more.
Principles of Risk Management
In short, there are 10 principles of risk management popularly known as 10P’s. These principles are basically what guides an organization in their day to day activities. Let’s take a deeper look into what these principles are:
Theoretically, this is often placed first on companies list, but practically it isn’t where people begin to make their decisions from. Policy, however, is a crucial aspect in developing techniques that’ll facilitate the policy aim to be met.
A more practical approach may be where other components of the 10P’s spread into thereby making it more engaging. Several policies may be cultivated concerning the following factors:
- Environment and waste management
- Employment and equal opportunity
- Health and safety
- Purchasing and financial control competition
- Accident investigation, reporting, and rehabilitation
Ideally, these policies should be made in a way that they coexist with each other and have a great effect. In conclusion, it should be able to build a feedback channel from other 10P’s elements.
This involves planning at the practical operations and managerial level with every other information reporting back to this stage. At the planning stage, priorities for actions are decided.
Since other P’s feed on this stage, they must be assessed in a manner that they remain significant in decision making. For instance, the majority of the work done in current years to create tools for business health and safety risks is due to this element given lesser priority to financial cases.
A few questions asked at this stage are:
- What is the purpose of planning activity and who’s interested in results?
- Who’s involved in the planning process?
- How do the other P’s feed and impact this phase?
- How do you decide on priorities?
Product or Service
There are several risk factors related to the products or services. These risk factors tend to ask questions about the production of goods, purchasing, waste management, and more. These risks are:
- The company’s current and future competitive position
- Environmental issues that affect the development of the company
- Stages of life cycles of the product and current trends
- A spectrum of internal or external pressure on the business
- Life trend and demographic changes
Moreover, risks associated with the process can vary greatly. Although, this depends on the type of business being considered. However, a few basic questions are still associated with this element. These questions are:
- Do the government initiatives support and encourage these firms?
- Do the techniques used inherent the risks associated with them
- Is there a potential impact of technology on this technique?
- What are the chances in legislation and their impact on the choice of techniques?
- What are the government initiatives to support and encourage firms to contemplate using new technologies?
- Is the skill level of available staff, both in-house and more largely in the geographic area?
The premises of an organization is usually a significant risk factor for smaller firms. However, they often have restricted access to suitable premises when at their startup stage or expanding their production. A range of risk factor for this element includes:
- The size of premises and facilities available
- Financial concerns of premises either relating to ownership or occupancy status, expansion, repairs, etc.
- The safety of the premises, its health, fire, general safety, and environmental risks
- The location and means by which the product or services gets to their customers
To manage the risks that could occur in an organization, it’s important to assess workers in the firm. Especially temporary workers and non-traditional forms of workers. Although, some firms have broader considerations as risks to visitors and the general public are recognized.
Other issues that may arise from this form of risks management includes:
- Cultural matters, especially the culture within the workspace
- If there’s a need for union recognition of workers
- The skills and competence of workers and how they can fit future purposes
- The training and supervision of workers
- The legislative prerequisites aimed to reduce risks to workers
- How workers are organized either as groups or teams
Much more than protecting the health and safety of people, this also includes recognizing the risks associated with the protection of the:
- Intellectual rights
- Data and security
- Other concerns such as law and insurance
This element relates closely with other 10P’s. Especially the process, the people, and the products. The kind of questions that may be considered in this element includes:
- Will this element be appropriate for future production?
- How will the introduction of new techniques be?
- How appropriate are these elements for current processes?
- Are these elements implemented as they ought to? Or are they monitored effectively?
- Do these elements serve to reduce risks or pose additional risks?
- How is their effectiveness measured or evaluated?
On the contrary, this element in risk management is often separated from consideration of other elements. Meaning, that they are not entirely associated with other elements in any way. There are broad issues that are often addressed in this element. They are:
- The firm’s policy on quality
- The government policy on standards
- The importance of recognized standard in the future
In addition, there are more specific issues for the firm. These issues are:
- Types of material, availability, and delivery
- Cost and payment conditions
- Technology renewing or replacing
- The equipment and machinery used
Lastly, performance as a risk factor relates to the criteria and performance measure chosen by the firm. Before this can be looked into, a few questions are often asked. Such as:
- Who are the stakeholders that want to know about the performance of the company?
- What are these stakeholders looking for in a company?
These questions will influence the types of risk measurement chosen for a specific element. The business performance and how effectively risks are being managed are also taken care of in this stage.
Also, the performance evaluation can be assessed at an individual, departmental or company level. It also may be related to the individual firm or be part of a standard exercise.
Questions about accidents and injuries, health and safety, quality, and environmental standards will be part of this evaluation risk management also.
Example of Risks
There are various instances of risks available. But one major example of both the liquidity and financial risk is the bankruptcy filing that occurred in September 2017. The company involved encountered a financial risk through a buyout in 2005 to the tune of about $6 billion.
However, they were unable to finalize with the target and so there was an attempt to liquidate over 700 of its branches in 2018. In a bid to do that, they were faced with liquidity risk and so struggled with selling their company.
Many analysts claimed the disaster was indicative of a financial and liquidity risk regarding debt buyout for creditors and investors.
Companies That Specialize in Risk Management
There are a few companies that specialize in risk management. Some of these companies were listed and explained below.
KPMG is one company that specializes in risk management. They ensure their clients’ risk framework is aligned to their business plan. Additionally, they endeavor to promote business value by assisting their clients effectively manage risks, reduce cost and improve the productivity of the business.
Their team of risk professionals encompasses individuals and teams who are dedicated to providing precise and practical advice to their clients. Their advisory service is about:
- Climate change and sustainability
- Finance and risk
- Compliance and conduct
- Project risks
Deloitte is another referred quality risks management company that focuses on quality risk management and liability control. Due to uncertainties and complexities of the risk landscape that remains volatile, Deloitte actively monitors, strengthens, and improves the risk management of culture.
In addition, Deloitte professionals get to learn new experiences while promoting a constant risk-intelligent culture. If many risks materialize, it could affect Deloitte’s business policies and so its enterprise framework is made to proactively identify, monitor, and handle risks.
EY’s financial service risk management resource offers you a variety of quantitative, qualitative, technology, and regulatory skills. For instance, these industry practitioners assist you with professional risk management services in global and local regulatory environments.
This is another risk management company that has gained experience in proper risk management skills. BearingPoint consultants have trusted experts from the initial stages of the blueprint or strategy phase to detailed operational implementation.
Additionally, they know how to combine technological, functional, and data skills to bring about a collective and creative mindset to their clients. Their major areas of services are:
- Finance excellence and SSC
- Finance strategy and operating model
- Modern ERP
- Controlling and performance management
- Regulatory risk management
Delta Capita is a uniquely developed risk management service that gives a pricing model performance, model validation, and continual monitoring of derivatives. Moreover, the outputs are usually illustrated using high-resolution 3D visuals.
Their risk management solution can be used with all assets and proceeds. They also monitor risk on portfolios or single models. A few benefits of using delta help are:
- It gives you an increased capacity for model developers and owners
- You have an all in one emulation for model performance
- There’s a substantial reduction in the model lifecycle
In short, risk Management is an effective skill needed for building a standard business or company. Additionally, undergoing a risk management course should be a must for intending and actual business owners. However, some business owners may not have an understanding of the skill involved.
Where this is the case, consulting a financial advisor could be your best bet. Moreover, a financial advisor is properly acquainted with risk management and how important it is for a company’s growth.