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What is Risk Management?

Risk management is a critical part of any organization’s strategic plan for success. It is defined as the process by which upper management methodically analyzes, recognizes and addresses the risks associated with specific business activities, systems and decisions.

What are the Goals?

The purpose of risk oriented management is to not only identify and treat threats, but also maximize the value and sustainability to all of the organization’s activities. It utilizes the potential upside and downside of risk factors that can affect the organization. It increases the probability of financial and operation success and reduces the probability of failure and the associated uncertainty that precedes it. Risk orientated management is a continuous process that influences every level, activity and department of the company.

It must be integrated into the company’s culture through effective policies and proactive support from senior management. These policies must translate the strategies into business processes and operational objectives by incorporating responsibilities into job descriptions. This will increase accountability, performance measurement and reward opportunities. It will also directly impact the company’s revenue and profit margins.

Risk Categories

There are many types of risks that organizations face from both external and internal factors. Some of the biggest risk areas have both external and internal drivers, so they overlap into different categories. First, strategic risks are long-term concerns that can be affected by things like political risks, capital availability, regulatory changes, economic stability, and industry reform. Operational risks are the concerns of day-to-day business functions, like sales and customer service.

Financial risks concern the effective accounting controls of the organization and the effects of external factors like credit availability, foreign exchange rates and interest rate movements. Knowledge management risks concern the effective protection and management of the resources. Some of these biggest risks include data breaches, intellectual property rights and new competitive technology. Compliance risks include things like health, safety, environmental, employment practices and consumer protection.

What are the Benefits?

Risk-based management adds value and protects the organization through meeting certain objectives. It provides a centralized decision making framework for companies to manage business activities in a consistent and controlled manner. It is very effective with improving strategic planning by structured and comprehensive analyses that measure volatility, frequency and opportunity. It will contribute to a more efficient allocation of capital, credit, resources and personnel.

Risk management will focus attention on critical operational areas and reduce attention to non-essential areas of the business. It will protect and enhance assets, brands and the company’s image. For example, companies that better handle risks are more likely to outperform their competitors and maintain high levels of customer satisfaction and engagement. It is very good at optimizing operational efficiency by streamlining workflows, employee duties and procedural tasks. A heightened awareness of risks will also increase the company’s agility when it comes to unexpected emergencies.

All types of business undertakings come with the potential for events and consequences that may result in both benefits and threats. Risk management is recognized as the strategic tool to manage outcomes while protecting business assets. Forbes magazine offers helpful tips on how to enhance the management of risk here.

See also: Online Master’s in Finance: Top 15 Values 2016

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