Why Risk Management is Essential for Your Business

Uncertainty is a constant in business, but robust risk management can help companies adapt and thrive.

Enterprise Risk Management (ERM) is defined by the Committee of Sponsoring Organizations (COSO) as “a Process, effected by an entity’s board of directors, management and other personnel, applied in strategy-setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.”

In short, it is the process of identifying possible risks, problems and disasters before they happen.

Risk Management for Business

Businesses are vulnerable to daily internal and external events that have unfavorable effects on the business and hinder the achievement of its objectives. Risk is a constant presence in businesses and ignoring it does not make it go away. To deal with the many risks faced by businesses, we need a systematic way of managing risks and Risk Management provides a comprehensive solution to this problem.

The risk management process involves:

The identification of risk surrounding all the activities of the business;
Identifying the cause and consequence of the risk events;
Reviewing the probability of the risk events and rating risk based on the probability and likelihood of occurrence;
Putting in place the risk response and ways to minimize the risk;
Reviewing of the risks in a periodical basis; and
Reviewing the effectiveness of the risk assessment approaches and communicating it to the parties involved.

External & Internal Risks

Risk can come from internal and external sources. The external risks are those risks which are not in direct control of the management such as political issues, interest rates and exchange rates.

Internal risks are within the control of the management such as non-compliance issues.

By identifying risks before they occur, businesses are given the opportunity to prepare and assign solutions to the risk event before they occur.

Application

Risk Management can be applied at many levels in an organization. It can be applied at a strategic level or at tactical and operational levels. It may be applied to specific projects, to assist with specific decisions, or to manage specific recognized risk areas.

Risk management is essential because without it, it is difficult to define the objectives for the future. If a company makes its objectives without considering the risk inherent in those activities, it will definitely lose direction once those risks materialize. However, if all the risks which relates to the achievement of objectives are defined, it will allow businesses to determine what needs to be done in the event of crisis and might even help the business to turn a crisis into an opportunity.