The Importance of Risk Management in Business
Updated: Nov 14, 2019
The critical process of identifying risks, assessing risks and developing strategies to manage risks is known as risk management. A risk management plan and a business impact analysis are important and crucial parts of your business continuity plan. By understanding potential risks to your business and finding ways to minimise their impacts, successful risk management affords a small business an opportunity to thrive, grow and ultimately enjoy the fruits of success.
Risk exposures are one of the most overlooked areas in small business in spite of the fact that it is clear to most small business owners that operating any business involves these hazards. While taking a risk and winning are fun, prudent business owners take care to minimize the loss, as in any type of venture or investment. A good risk management system is imperative and requires a continuous process of analysis and communication.
Recent studies strongly suggest that poorly thought out risk management plans are almost as bad as not having one because they can be time consuming, provide no long term benefit, greatly reduce operating costs and ultimately, profit. Preparation for marketplace risk is attained through a well thought out business plan. One thing is certain, unexpected events will transpire. A good plan not only has adequate insurance coverage’s to compensate for losses which might occur, but it includes a plan to prevent losses, if possible, and to manage unexpected events.
There are risk management procedures for every category of business. What is significant is that the process and benefits resulting from a solid plan will produce positive and noticeable results. It is also important to understand “mitigating damages which is a term used over and over again in risk management. The definition is, “the use of reasonable care and diligence in an effort to minimize or avoid injury.”
The Risk Management process is a 5-step process:
• Identify and Evaluate the Potential Loss or Risk – Which is self-explanatory.
• Allocate ownership – Accepting the risk. Taking the chance that the negative impact will be incurred. Who to call, what to do, how to respond to an incident.
• Plan for Mitigation – What is the plan to avoid consequences? What is the plan to prevent losses from happening again?
• Action – Be proactive, always. Have an emergency plan before it happens.
• Assess effectiveness – The outcome will demonstrate eithera decrease of incidents or none at all, which is the goal.
In conclusion, a good and reasonable risk management plan is a strategic management approach to foresee the risks, estimate the impacts and create response plans to mitigate them. Every manager and business leader needs to be aware of the practices and principles of effective risk management. Understanding how to identify and treat risks to an organization, a program or project can save unnecessary difficulties later on, and will prepare managers and team members for any unavoidable incidences or issues.
An effective risk management plan will assure the growth of a business and provide a solid foundation for success in this ever-changing world of risk.