Risk lurks behind every decision and action in the business world. The possibility of unexpected outcomes and undesirable effects is a constant shadow that decision-makers must face. How do they navigate the fear of the unknown and the absence of certainty? The answer lies in risk management.
Risk management is a proactive approach to identifying, assessing, analysing, and mitigating risks associated with organisational objectives. It is the shield against uncertainties that can undermine success. Without it, businesses expose themselves to unnecessary vulnerabilities.
In this blog, we delve into the importance of risk management and how it empowers organisations to navigate the challenging landscape of risk. From understanding the two major types of risk to exploring effective risk response strategies, we uncover why embracing risk management is a smart business move.
Join us as we unravel the world of risk management and explore whether the lack of risk management initiatives is truly worth the risk. Prepare to gain insights that will revolutionise your approach to decision-making and safeguard your organisation’s future.
What is Risk
Risk is the possibility that an event, process, or execution does not go as planned. It can also be defined as the uncertainty of undesirable outcomes or effects on objectives.
From a broad point of view, there are two major types of risk: Systematic risk and Unsystematic risk.
Systematic risk deals with risk arising from external factors that affect the outcome of a set objective, while Unsystematic risk looks inward to curb asset-specific risk that could lead to undesirable outcomes for set goals.
The concept of risk plays an active role in every action or decision a business takes; the possibility that a decision will not pan out as expected is always looming over the heads of decision-makers. So how do they still go ahead and make those big decisions with the fear of the unknown and lack of certainty ever-present?
What is Risk Management?
Risk management simply means taking steps to curb all possible risks present in every objective actualization embarked upon by an organisation. Risk management requires the ability to identify the said risk, assess and analyse this risk, and then implement measures and controls to mitigate the risks identified. It doesn’t just stop here; the implemented controls need to be constantly reviewed and modified if needed. It is important to note that risk management is approached proactively and not reactively..
The proactive approach means preempting the risk and taking the steps to mitigate it, while with the reactive approach, it is already too late because the damage has already been done.
An organisation’s Response to Risk has a major impact on the outcomes of risk management processes.
Businesses are advised, as a best practise, to approach the development of risk contingencies with a problem-solving mindset. These contingencies should be well-detailed and ready to be executed as soon as the need arises. Having such plans laid down puts the business in a pivotal position to respond to risks as soon as they are identified.
Response to Risks usually takes one of the following forms:
AVOIDANCE: This involves getting rid of the root cause of said risk in a bid to avoid such a risk.
MITIGATION: Setting up control or effecting already-aid-down contingencies’ to sufficiently reduce the possible occurrence of the risk
Acceptance: In some cases, a business may be forced to accept risk. This option is possible if a business entity develops contingencies to mitigate the impact of the risk, should it occur.
Importance of Risk Management
Risk management is an important procedure because it provides a company with the tools it needs to correctly identify and manage potential risks. It is easier to reduce risk once it has been determined. Furthermore, risk management provides businesses with a foundation on which to make informed decisions.
Risk assessment and management are the best ways for a company to plan for events that may obstruct progress and growth. When a company assesses its plan for dealing with potential risks and then implements contingencies to deal with them, it increases its chances of achieving success with its business goals and objectives.
Progressive risk management guarantees that high-priority issues are addressed as quickly as possible. Furthermore, management will have the essential knowledge to make informed decisions and ensure that the company remains profitable.
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