Risk Management Risk management refers to a formal process of evaluating and then taking steps to control a company’s exposure to facing a loss, which is based on the estimates of the probability of loss. (David Robinson, 2006). Traditional risk management looks into the physical and legal causes of risks faced by an organization and financial risk management look into the risks that an organization has to face when using traded financial instruments. In order to understand risk management, we should understand what is risk and treats. What does the tem risk imply?
Risk means that there is the likelihood of something untoward happening. For example, launching a space shuttle into space has the risk of the shuttle never returning back to earth. A company may launch a new product, but they have to faced the risk of it not being so-well liked as their older products, thereby their investments carry with them the risk of losses. Threats are risks caused by the behavior of competitors in the market. For example, a major competitor could take all the customers from a company which had a foot hold in the market.
Ideal risk management is one which minimizes spending at the same time it maximizes the reduction of the negative effects of risks. Risk management is done by following risk management techniques. Risk management techniques include risk identification, assessment of the risk, risk tolerance and diversification, avoiding risk and reducing the impact of risks, risk transfer, scenario analysis and contingency planning and regret analysis. Following is a brief into each of these techniques: Risk identification and scenario analysis: Identifying risks involves ascertaining those areas or issues which hinder or go against achieving business objectives.
Given a particular scenario, what is the likelihood of the risks faced by the company should be marked out. Risk assessment: Here, the impact of the risk in terms of losses and in terms of disruption of work should be analyzed to understand the extent of the impact. Risk identified should be assessed as noticeable, moderate or severe depending on the level of impact. Risk Tolerance: This is a process of looking into whether the risk can be borne by the company without significant damage to work reputation and achieving business goals.
Risk Transfer: Here risks which are identified can be obviated, by transferring it to another entity. Avoiding Risk: Here, if the risk is too great then it is better to altogether avoid taking the risk rather than facing the mishap which may cause a great deal of damage to business and work activities. Contingency planning: This involves making plans about what should be done, in the vent of a risk occurring. Regret analysis: This is a process of looking into what the company would lose if they do not take a risk.
Part of risk management is business continuity management, which is the process of looking into how a company can face problem situations such as threats and uncertainties and how it can respond to these situations. It is mandatory for suppliers of goods and services to implement business continuity according to the Civil Contingency Act. Through Business continuity an organization shows that it cares for its shareholders and its helps to reduce reputation risk in the event of a disaster.