RISK MANAGEMENT – IDENTIFICATION OF THREATS
Risk management is the complex cycle that identifies the existing and future threats of an organization. This process not only determines the threats and hazard, but it also assesses and controls the organization’s adverse outcomes, which may affect the capital and earnings of the company in the long run. These threats and risks may stem from multiple sources like long-term Mortgages, strategic management errors, financial uncertainty, and natural disasters. In addition, some of the threats are high priorities by many businesses, such as IT-related or data-related risks, which badly harm the image of an organization. So the Risk management team plan variety of ways to overcome these type of issues by increasingly includes company processes for controlling risks factor and protecting the digital assets of the company.
In the era of Digitalization and Modernization, many businesses face unexpected risks. Some of these risks or threats are under the control of the risk management team, but some risks are uncontrollable for the risk management team, which can cost the company financial losses or result in the permanent closure of the company. Effective risk management helps the company to control maximum future crises by proactively executing plans of analysis and regulations. Therefore, effective risk management is a crucial sector for any business which offers the potential to reduce the surplus impact of risk.
Risk management allows the companies to prepare for unpredictable or unexpected risks to minimize the company’s cash flow, which negatively impacts the business in the long run. The importance of Risk management for any business is briefly discussed below:
Importance of Risk Management:
Risk management plays a vital role in managing and analyzing the risk factors for the company, and it is the essential and core factor for any business. Risk management helps businesses grow in such a manner that they minimize the risk of the extra flow of cash and protect the future of the businesses. This ability to control and analyzing the risk enables an organization to think widely and make organizations more confident in the decision-making process. But, on the other hand, risk management effectively gives guidance to the business to accomplish their company goals more effectively.
Some of the other significant benefits of risk management are:
- Risk management creates a secure and safer working environment for both staff and stakeholders of the business.
- This process enhances the stability of the business by giving the surety to decrease the company’s legal liabilities.
- Risk management protects businesses from events that are detrimental to the environment.
- It also protects the people and assets involved in the formation of business from potential harm.
- Risk management also involves establishing the organization’s insurance needs which reflect on saving unnecessary premiums.
Risk management strategies and processes
The risk management cycle follows a particular step that combines to make the cycle effective and efficient. The risk management cycle composes of the following strategies and processes:
The risk management system understands the risk by establishing the context through which the rest of the processes occur. The criteria used for this should also be well established and well-defined.
Through using risk management, the businesses identify potential risks that may negatively affect the operation or processes of the company, which may negatively affect the company’s outcomes.
After identifying risk, the risk management department analyzes the risk and determines the type of risk, what is the intensity of risk, and the consequences that will make through the risk. On the other hand, it also analyzes the influence of that particular risk on the company’s goals and objectives.
Risk assessment and evaluation:
After analyzing the risk, the risk management department makes the processes to evaluate the overall consequences or outcomes of the risk, which further helps the company in decision-making processes that whether the risk is tolerable or not.
In this process, the risk management sector makes an index on which risk will be ranked. The risk density is measured and analyzed in this step, based on the ranks of the risk. The highest-ranked risk comes first in the list on which the company must take prior action to control the consequences of that risk.
This process is one of the parts of mitigation, which follows both the risk and the overall plan against that risk, and based on this, companies update their plans. On the other hand, risk management continuously monitors the new and existing threats that may harm the company’s profitability.
Communicate and consult:
Risk management involves both the internal and external stakeholders in every step through communication and consultation.
The risk management sector identifies, analyzes, evaluates, and monitors the risk or threat factor that negatively affects the business and may influence the operation and other processes of the business. For example, almost every organization faces unpredictable risks and disaster events in their business life cycle, which may permanently close businesses. Risk management allows the company to prepare for that kind of risk and event and take supportive action. On the other hand, strong risk management will also positively affects the decision-making process of the businesses.