Recognizing the Role of Risk Management

by Arthur L. GRC analyst

Almost every firm engages in actions that are related to the idea of "risk." Money in bank accounts is at danger in the case of a financial institution's collapse, a business partner may turn out to be a fraudster, resulting in losses for the company, an employee attributed to the staff may lack competency, and so on. Additionally, natural disasters, economic and financial crises, attacks on computer networks, and other unforeseen events may occur in our life. All of this might result in major damage to the organization or even jeopardize its operations at any time. As a result, it is critical for the company to implement effective risk management in addition to the well-established procedures related to product manufacturing, procurement, and marketing.

To make educated and right decisions in the face of uncertainty, it is critical for the company to have a risk management policy. This procedure is governed by an internal policy document referred to as a risk management program. It is divided into numerous sections:

Risk Management's Goals

While different forms of hazards may follow an organization's operations depending on its sector of activity, strategy, and business climate, there are several broad objectives that may be accomplished by effectively managed risk management.

Typically, the primary objective of a risk management group inside a business is to maximize efficiency, maximize revenues, and minimize expenses. According to some experts, the primary purpose of risk management is to optimize the most lucrative capital investment and profit. The second belief is that this is a stable increase in the development of the firm, minimizing the possibility of the company's worth being lost.

A business's risk management practices are relatively straightforward:

The approach begins with risk identification. It outlines and describes the risks associated with the project, as well as their connection to one another.

After that, these hazards will be divided into several categories.
1) Risk assessment. A risk assessment is conducted at this point. Specifically, the chance of hazards occurring, and the magnitude of possible damages are estimated; risk boundaries are defined and created.

2) Risk mitigation. Following these processes, measures are designed at the planning stage to prevent the occurrence of risks and to remove their repercussions (if the risk has occurred).
3) Command. Internal risk management control in a company entails monitoring recognized risks and doing scheduled preventative activity. And next, if an issue has been recognized, you should build a response to it.

4) Senior management or shareholders accept and implement the organization's risk management policy. The remainder of this paper reflects the information contained within.

Consider the following primary categories of hazards linked with companies' activities:

Credit Risks

These are probable losses resulting from the counterparty's reluctance or inability to meet credit agreements fully or partially. When a business entrusts its finances to a partner, it takes on a specific form of risk - credit risk.

Market Risks

This type of risk is defined by the likelihood of experiencing losses as a result of changes in market conditions: price variations in the products market, currency exchange rates, and the stock market.

Risks Associated with Liquidity

The risk of loss as a result of the enterprise's failure to meet its commitments owing to a whole or partial lack of money in a timely way. These risks result in fines and penalties, damage to the organization's commercial reputation, and, in severe situations, insolvency.

Operational Risks