No matter how big or small your organization is, there are risks that you will have to manage. Some of these risks can be mitigated with careful planning, while others cannot be avoided. As a business owner, it’s essential to know the difference between these two types of risk and take appropriate steps to prevent disaster. A risk management procedure is a set of actions to identify, analyze, and manage risk. Many different types of risks can affect your business. Therefore, we’ll also discuss some risk management procedures to help you avoid any potential problems.
- Risk awareness- Risk awareness is the knowledge and understanding of risk. Risk awareness can come from various sources, including personal experience or an event that has been widely publicized in the media. An organization should promote risk awareness programs by educating employees about risks, upgrade to new technologies to increase transparency.
- Risk prevention- Risk prevention involves taking measures or following procedures in advance to avoid any threats in the future. Examples include monitoring safety devices, reviewing precautionary measures, involving the risk management team.
- Risk mitigation- Risk management and reduction techniques can be applied in many different ways, including insurance for people and property, off-site storage of valuable assets, redundancy in IT systems and physical infrastructure. The aim is to prevent an event from happening – or if it does happen, minimize the negative impact so that you are not left with substantial financial losses.
Types Of Risk
Here are different types of risk that needs to be addressed differently in risk management:
- Financial Risk- Financial risk is a danger that all businesses face. It poses the threat of causing your company to go bankrupt, and it can also affect your employees, customers, suppliers, and investors. It doesn’t matter if you are considering opening up your first store or running an established company; the risks of not having enough money to cover expenses and pay off debt can be devastating.
- Environmental risk- As production increases, more damage is done due to the release of toxic waste and harmful gases. Companies need to follow the guidelines or switch to alternative technologies to reduce their environmental impact, enhancing their goodwill.
- Legal risk- Legal risk is something that businesses need to be aware of to avoid costly litigation or even jail time for executives. The legal department manages the company’s legal risks through compliance, contract review, and general counsel services. Legal risks can arise at any point in time during an organization’s lifecycle, arising from regulatory requirements to contractual obligations.
- Operational risk- Operational risk is a type of business risk that can lead to lower profits, higher expenditures, and even the company’s loss. The term operational risk refers to mistakes or accidents that occur during day-to-day operations.
Responsibilities of Risk Manager
- A Risk Manager is responsible for identifying and analyzing risks that could affect your business in some way or another. They also take steps to minimize these risks so that nothing terrible happens. This includes setting up insurance policies or managing risk exposure with different hedging techniques.
- Ensure employees receive appropriate training and information about reducing or eliminating risks within their functions and areas of responsibility.
- Implement control systems and measures to safeguard the organization’s assets. Provide a report of the financial impact of loss to the management and organization and suggest mitigation measures to reduce their effects or prevent them in the future.
- Prepare risk management and insurance budget and share the premium costs across various departments.
Risk Management Framework
- General – The risk management framework aims to help the organization involve risk management in various functions and departments. The effectiveness of risk management depends on how the management involves it into their governance. The organization needs to review its existing risk management procedures and address any shortcomings within the framework.
- Integration- Risk management should be integrated depending upon the organization’s structure and framework. Any changes in the organization structure should be incorporated into the risk management framework. It should be a part of organization objectives, strategy, and operations.
- Design- When designing the risk management framework, the organization needs to consider the external and internal circumstances. The external events may include:
- Social, political, national, or international factors
- Important factors or situations are driving the organization’s objectives.
- Views and expectations of external stakeholders.
- Commitment- Top management should convey their commitment to risk management through a policy or document that should include:
- Organization’s purpose for managing risk consistent with its objectives.
- Leading the implementation of risk management into the core business and culture.
Steps To Risk Management
- Identify the risk- The first step is to identify the kind of risk you face since the organization is involved in various operations. Identifying and documenting them at an early stage will make it easier to take proper mitigation measures. Due to advancements in risk management solutions, this information can be easily stored in a system that business leaders can later access.
- Risk Analysis- After identification, the risk needs to be analyzed from a different point of view. Determine the severity depending on how many business areas it can impact. Use specific risk management plans to determine risk exposure levels and classify them into various categories. Rank them as per their severity level and assign the responsibilities to the concerned people to mitigate them.
- Risk treatment- Connect with the experts of the field to which the risk belongs. Break down a problem into different components and brainstorm solutions to mitigate them. Low severity risks can be ignored, whereas certain risks require the intervention of upper management. Send frequent notifications to stakeholders regarding the risks and possible solutions implemented.
- Monitor and review- Risk monitoring and review refers to the process of identifying and assessing risks in an organization, deciding what actions should be taken to manage these risks, and reviewing the outcomes of those actions. It should take place in all stages of the organization. The feedback gathered from monitoring and review should be incorporated into the organization’s practices.