Jul 05, 2019
‘How does risk management add value to my company?’ This is a commonly asked question by both new and experienced entrepreneurs. Although as an entrepreneur, you might have come across the phrase ‘risk management,’ it’s still possible that you are still unsure of exactly what it entails. That’s understandable and we are here to provide all the necessary answers. Continue reading to find out exactly what is risk management as well as some useful tips for managing business risk.
Whatever the nature of your business, it is exposed to numerous risks. Whether it’s a small or large company, learning to deal with the oscillation and unpredictability of the business’ niche market is fundamental and this is when risk management comes in.
When it comes to identifying risk, a distinction is made between strategic (corporate risk management) and operational risk management. Corporate risk management closes the gap between corporate strategy and operational risk management. It analyzes, assesses and controls all your entrepreneurial risks that can arise from the environment of leadership, organization, market, environment, business processes, finance, human resources, IT, etc. The main focus is on the fulfillment of the corporate strategy. As a rule, the top-down approach is chosen and a worst-case scenario analysis is carried out and mapped into a risk profile.
In operational risk management, your company and its business processes are systematically and continuously analyzed for their risk potential and the focus is on individual risks.
Risk management helps your company to consciously deal with opportunities and risks, and thus to achieve the targeted goals – even if everything is not always running smoothly in everyday business operations. As there are constant changes, it is necessary to always be prepared to reduce the negative impacts and act appropriately when an unexpected event arises.
The management of risk begins by detecting the possible dangers to which the business is exposed to, and then taking the appropriate measures and implementing the necessary processes to minimize or eliminate those dangers.
In essence, risk management means the continuous assessment and assessment of events, actions, and developments that could hinder your company from achieving the objectives and successfully implementing the strategy. Remember, not everything in business works according to plan; an important employee might quit in the middle of an important project, the manufacturing machine can suffer damage in the middle of production, an important supplier can go bankrupt, or a long-time customer can be taken over by the competition. With a good risk management strategy, all these events will have minimal impact on your business. To efficiently identify risks within your business, the following tips will help;
Identify potential risks: The first step is always to identify potential risks and dangers. Where are the dangers lurking? What could go wrong? What difficulties could arise? And what impact could that have?
The easiest way to identify risks is the worst case scenario. Think through what might happen in the worst case just so you know exactly where to expect a potential risk.
Examine the individual risks: Not every risk is a big problem and needs to be taken seriously. Therefore, before you actually act, you should first analyze and classify all risks individually. How big is the risk? How likely is it that the danger really occurs? How difficult are possible consequences?
The analysis allows you to prioritize each risk and know what you need to do quickly and where necessary, and where it may be enough to move on to a looming threat later.
Plan your actions: Now you have an accurate picture of the risks and can deal with the alternative courses of action, think about what measures promise the greatest success with regard to the goal of your risk management, what can you do to prevent a risk from occurring and how can you mitigate a hazard or potential consequences.
Ideally, you have an answer for every impending risk. This does not always mean immediate action. In some cases, it may be advisable to wait for more information or see if a risk is actually developing as anticipated.
Check the results: After implementing risk management measures, you must check that they have the desired effect. Of course, you can not predict the future 100 percent – it can also develop completely different than you assumed. Thus, with your first action, risk management is far from over. Without the necessary control, many measures will be ineffective.
Respond to the rest of the course: The cycle of risk management closes in this last step which is about reacting to the new situation. Meaning: which risks have occurred? Which could you avert or mitigate? How has the situation changed? And how can you deal with the new situation? So you begin to identify risks again and a new process begins in risk management.
You can not hide your business from risks. No matter what you do or how you decide, things can always go wrong or things can turn out differently than you hoped. Neither optimism nor pessimism is helpful in risk management. If you just try to talk nicely about everything, you ignore the risks and you may be able to jump right into big problems without noticing them in good time.
What is needed are neutral, fact-based observations that do not rely on wishful thinking or black-and-white painting (with the exception of identifying potential risks). Although successful risk management does not solve dangers and uncertainties, it makes it easier to learn how to deal with them. That’s why risk management is actively practiced in companies in many large firms in order to remain successful in the long term and to be able to react to the dangers within the industry.
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