The Do’s and Don’ts of Successful Risk Management

Successful Risk Management

Businesses don’t like uncertainty, but the reality is that this is something they must face every day. With this uncertainty comes risk, which must be adequately managed and mitigated, and this can be challenging in itself. So, how can businesses work towards successfully managing risk? Here are some ways this can be worked towards, plus some things which should be avoided.

 

To Identify and Assess Risk 

In our modern world, risk is difficult to escape, especially as far as business is concerned. Even the smallest of financial changes in one corner of the globe can massively affect industries in another. A company might need to increase their prices, which means they could lose out as customers seek a more affordable alternative. It’s also not just cost that organisations need to worry about. Legal issues must also be considered, and these will vary from country to country. In other words, organisations need to adjust their operations appropriately to meet legal requirements. Organisations must also consider political and regulatory risk, plus any other forms of risk that could possibly impact their business.

 

Do Quantify Risks

Once you’ve determined the types of risks you might face, you should then quantify them. This can be challenging; after all, measuring risk is not an easy task. However, to manage risk well, it is an essential task. Tools do exist that make quantifying risks much more straightforward, like risk management software, or valuation models which can be very helpful in decision making.

 

Don’t Dismiss Interrelated Risks

Our world is highly interconnected, and with this, comes more and more risk. Furthermore, many risks work in tandem with each other, resulting in another, much greater risk. Perhaps what is most worrying is that many of these overly inflated risks are not evident whatsoever. For example, if a recession occurred, and prices fell. The result for many companies would be a struggle to remain profitable. The bottom line is, always consider interrelated risk rather than single risks.

 

Do Utilise Resources

Some companies view risk as being theoretical. In other words, because it cannot be seen, it cannot be managed, so it should be ignored. The reality is that adopting this kind of attitude to risk is highly dangerous. Think along the lines of what happened with local newspapers throughout the ’90s. At the time, many were doing incredibly well. Then along came the internet, and people checked the news online instead. Rather than adapting to this, such outfits continued purely with print. Not long after, they were then forced to close as a result. Companies can be reluctant to spend money on managing risk. However, the most successful ones always tend to commit sufficient resources to this vital task and continue to be successful as a result.

 

Don’t Dismiss the Risk-Return Ratio

Many businesses don’t actively deal with risk, simply because they don’t want to have to deal with it. However, it does need to be appropriately managed, as it does help to achieve the best possible business outcomes. As part of effective management, organisations need to take the right measures to lower their risk exposure. However, they shouldn’t be expected to eliminate risk entirely, as this is wholly unrealistic. Instead, an organisation should determine the kind of risks they can tolerate, and which ones would be damaging to their business. In other words, taking a risk that could result in better future financial returns would make sense. As would the risk of entering a new financial market for the same purpose. Contrastingly, potentially catastrophic risks should never be considered. Such as compromising worker safety to marginally improve profit, with a later risk of possibly having to deal with a lawsuit.

 

The Most Important Points to Remember about Risk Management

Avoiding risk entirely within an organisation is impossible, as risks exists everywhere and are constantly evolving and merging into even more significant risks. If that wasn’t difficult enough, most risks are not visible. But just because we can’t see them, doesn’t mean we can’t do anything to deal with them.

With this in mind, organisations must invest in some level of risk management, which is far more cost-effective than having to deal with the potentially devastating consequences that can occur.

Risk must be quantified and managed correctly, which can be achieved far more efficiently by using risk management software and valuation tools. Using them makes it easier for organisations to determine the risks they can tolerate, and ones which could impact them detrimentally.

Above all, organisations should consider some degree of risk when the outcome could be beneficial. However, this shouldn’t be done for something like a small cost-saving, especially when taking into account the impact the risk could have.