Risk Management: Functions, Process, Objectives and Importance
Looking for Risk Management Definition, Risk Management Functions, Risk Management Process, Risk Management Objectives, Risk Management Importance? Then here you will get all the details in this article.
Have you ever wondered how to reduce losses? How to take advantage of opportunities in time? Well, you can do it with Risk Management.
Every activity, process or function has a risk associated with it, but it will affect you to the extent that you manage it.
For this reason, today I will speak to you about Risk Management, its processes and the importance it has for the fulfillment of your objectives.
These are the points that I will explain today:
- What is a risk ?
- Learn about Risk Management
- Risk Management Objectives
- Risk Management Process
- Importance of Risk Management
- Functions of the Risk Management Department
- In summary
Manage the risks of activities, processes and functions and achieve the success you desire .
What is a risk?
Before explaining what Risk Management is about, you should be clear about what a risk is.
A risk is everything that causes you insecurity, uncertainty and, believe it or not, it is not always a bad thing.
Sometimes risks are an opportunity for better benefits. The same thing happens with organizations.
In a company, there are almost always economic, market, financial risks, with personnel, with operations, in short, with everything. All activities have a risk, some with a higher degree than others.
Ideally, you should know how to identify, control and act on this risk, in order to obtain the best results.
Learn about Risk Management
Now that you know what a risk is, I can explain what its administration is about.
Risk Management is another of the management disciplines, which helps decision-making after analyzing all the information.
In this context, it is the process by which the risks associated with an activity, process or function of the company are identified, analyzed and monitored.
Thus, it will reduce the losses that may occur in the company or maximize opportunities.
It is the process of identifying, evaluating and prioritizing risks (ISO-31000 Standard), followed by the coordination of actions to face said risks, trying to control the negative impact or maximize the realization of opportunities.
In this sense, Risk Management is proactive, that is, it anticipates future events, in order to control them and achieve objectives.
Risk management has been evolving. Before it was seen as a way to reduce losses, now it is already a more comprehensive discipline.
In this order of ideas, it now seeks to protect all those involved in the organization, such as: the human resource, the board, investors, customers, the market.
As in all branches of administration, it will use the material, human and technical resources of the company, in this case, to identify and control risks effectively.
Risk Management Objectives
The Risk Management allows identifying the possible risks that the function, activity or process of the company has .
There is a lot that you can achieve if you apply Risk Management correctly. So I name some of the objectives.
- Reduce losses when performing an activity, function or process.
- Help decision-making by using risk information.
- Improve the company’s chances of success .
- Optimize the opportunities that arise in the company
- Identify the possible risks of the function, activity or process of the company.
- Structure the risks, according to the level of involvement or priority, taking care of the costs.
Risk Management Process
In this process you must follow five (5) steps, I explain them to you:
1. Identification of the risk :
At this stage, instruments are used to detect what are the risks that may affect the company’s processes, functions or activities.
Among the most used instruments are:
- Financial statement analysis
- Analysis of manuals.
2. Assessment of risks :
It is the process where risks are ranked, taking into account the level in which they affect and the degree of occurrence of the event.
The internal and external factors are different in each company, therefore, the risks are also different.
Here the administrator evaluates the expected and non-routine risks that affect the objectives designed in the company.
3. Risk response :
After evaluating the risks, you must decide, what to do with them and how to remedy them. Some of the options are:
- Avoid carrying out activities so that the risk is not generated. If you do this it means that you did not find some way to reduce the impact.
- Reduce the consequences of the event or decrease its occurrence.
- Sharing risk among various activities to reduce impact. It is very common to divide the functions to eliminate the risk of fraud.
- Accept risk because its impact on functions, activities or processes can be tolerated.
4. Risk control :
Here, risk management is continuously reviewed applying monitoring activities.
In this context, control activities help to assess whether the responses established in the previous process are having the desired effect.
Many times, several forms of control must be chosen for the same response. Some of the main control activities:
- Application of management indicators.
- Audits of information systems.
- Infrastructure inspections.
- Periodic inventory counts.
- Review of budgets and forecasts by managers
5. Communication of risk:
Communication is essential in each of the stages that I have explained so far.
The administrator must ensure that all the units, areas and processes of the company handle both the risk information and the response to it.
Importance of Risk Management
A company not only has economic risks, but these arise in each of the areas of the organization.
So much so, that in the organization manuals, the risk that each position has for the integral health of the human resource must be specified.
In this sense, it is essential to identify the elements that cause uncertainty and that may affect the fulfillment of the objectives.
That is why you must have an area capable of detecting risks in time, to reduce losses or maximize opportunities.
Functions of the Risk Management Department
These are the functions that will be performed in the department in charge for this purpose:
- Design risk policies for the company.
- Identify the recurring and non-recurring risks of the organization.
- Design methodologies to assess risks.
- Establish responses to incidence events in the company.
- Create contingency plans.
- Control the risks of the organization.
Conclusion on Risk Management
Risk Management is the discipline in charge of the analysis, identification, control and monitoring of events that may affect the company.
Each process, function, activity or area of the company has a risk, therefore, it must be managed effectively so that it does not affect the normal development of the company.
A department in charge of this area allows minimizing losses and maximizing opportunities that arise.
I hope this information has been useful to you. Check out these amazing articles:
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Thanks for reading this article on Risk Management.