Risk management involves identifying, assessing, and mitigating or eliminating risks that could harm your business. There are many risk events that companies are exposed to; some are preventable while some can be mitigated. Developing a risk management plan is a security measure aimed at protecting a company’s capital and earnings. Here is a look at what a risk is, some common risks your organization is likely to experience, the benefits of risk management, and the steps involved in creating a risk management plan for your business.
What is a Risk?
A risk is the chance that a specific action will lead to a loss or an unpleasant outcome. The types of risks you are likely to experience will vary depending on your business. As a manager, you must be prepared to take certain risks based on your judgment of the risk-reward potential. Some risks can lead to great opportunities, while others will lead to huge losses. The first step towards creating a risk management plan is to define risks.
Types of Risks
As mentioned earlier, there are different types of risks that a business will come across. Some of the common types of risks are:
- Strategic risks: These risks affect your business’ objectives
- Compliance risks: These involve the need to abide by industry standards, codes of practice, and laws and regulations affecting your business
- Financial risks: These risks affect your financial systems and transactions
- Environmental risks: These are risks that you cannot control but can mitigate by making the appropriate preparations, e.g., economic conditions like inflation or unfavorable weather
- Operational risks: These are risks that are linked to strategic risks. Operational risks are factors that prevent you from reaching your business objectives
- Reputational risks: These are risks that affect the credibility of your brand
- Technology risks: These risks affect the normal operations of the business and keep activity at a standstill until the technological issue is resolved. For example, a power outage risk can be mitigated by having a back-up system for emergency electrical energy.
Benefits of a Risk Management Plan
1. Save Money
A risk management plan helps you identify significant potential risks before they occur, which, in turn, allows you to save money. With this plan, you will be able to adopt procedures that prevent potential threats and mitigate the losses associated with these threats. This helps your business to reach your goals.
2. Safe and Secure Working Conditions
A well laid out plan will identify the potential risks in a work setting and create policies that address these risks. Apart from considering workplace hazards, the plan will also deal with the enumeration of employees and job descriptions and roles. This helps prevent issues with employee turnover since you will have favorable employment policies.
3. Protection of Employees and Assets
A risk management plan is a security policy against risks that are detrimental to employees and business assets. In the event of any threat, the company will have procedures for mitigating unavoidable losses and protecting employees and company assets. The company may even have insurance policies in case of workplace injuries and incidences.
Stages in Creating a Risk Management Plan
A risk management plan involves various stages, with each phase helping you move to the next step. The stages of risk management planning will differ. Still, most organizations use a 5-phase model that involves identifying the risk, analyzing the risk, evaluating the risk, managing the risk, monitoring the risk. Throughout these stages, there is constant communication and consultation between all the stakeholders.
When creating a risk management plan like a vendor risk management policy, you need to know which questions to ask, the industry regulations and frameworks to consider, liability concerns, and how to monitor the risk management process.
1 Identify the Risk
Review your business and identify risks that are likely to affect your business. Some of the approaches for identifying risks include:
- Evaluating the functions in your business and then identifying anything that would negatively impact your business
- Reviewing the history of your company for previous incidents or complaints
- Searching for external risks that could affect your business
- Involving your staff in identifying possible safety concerns
2 Risk Analysis
After identifying all the potential risks, the next phase is to determine the odds of the risk occurring and the resulting consequences. Assessment of risks enables you to understand the cause of certain risks and how they could impact on your company’s goals and objectives.
3 Risk Evaluation
The next step is to determine the overall likelihood that a risk is going to occur and its overall consequences. This step helps you determine whether a risk is acceptable or whether the risk appetite allows you to take it.
4 Risk Mitigation/Management
Risk management is all about developing ways of dealing with risks. The most common risk management strategies include:
- Risk Avoidance: One of the ways to limit the damage caused by risks is by applying an avoidance strategy. This approach deflects threats to avoid costly consequences arising from a hazardous event.
- Risk Sharing: In some cases, you can evenly distribute the consequences of a risk. This means sharing the risk among several business departments or project participants. You can also transfer the risk to a business partner, vendor, or an insurance provider.
- Risk Retaining: There are cases where a company decides that a risk is worth taking and make preparations to deal with the consequences if things do not pan out as planned. The common trend among businesses is to retain a risk if its projected profit is greater than the costs incurred by the potential risk.
- Risk Reduction: There are certain risk events that you can control to a certain extent. You can reduce the scope or effect of certain risks that are likely to affect your company.
5 Risk Monitoring
In any business setting, new risks are likely to emerge. Therefore, it is vital for management to regularly perform review recent risk events and how they were handled and whether there are any new potential risk events. Risk monitoring involves following up on risks and developing a plan to monitor and track existing and new risks continuously. It is essential to review and update your risk management plan continually.
6 Communicating and Consulting
Creating a risk management plan should be an all-inclusive process. It is good for all stakeholders, both internal and external, to be involved if you are to make any headway. Decisions at each stage should be reached after consultation and communication between all parties. This way, no stone will be left unturned, and there will be no loose ends.
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Summing It Up
Risks are likely to arise in every facet of your life. You are likely to get into a car accident the moment you leave your home; there is a likelihood you will be robbed when you get out of a bank, and so and so forth. The same is the case for businesses. Specific risks are beyond our control and others that you can completely eliminate.
The best way to handle risks is to be prepared for them so that you are not caught unawares. Understanding what a risk is and identifying different types of risks is the first step towards bracing for these occurrences. Ultimately, with a risk management plan, you are entirely prepared for any unfavorable event that is likely to arise and affect your business adversely. The plan helps you to avoid, control, and mitigate risks, thus preventing huge losses and keeping your business on track.