Learn to earn
Learning Centre
"Constantly think about how you could be doing things better."
- Elon Musk, Investor & Entrepreneur
6 min read
By Nick Bell

What is risk management?


Business

No matter how safe the industry or company seems, there is always a chance of risk. Risk management identifies these potential risks to a company’s financial health. Their main priority is finding and assessing these risks and finding ways around them. These risks come in many different forms.

Some ways that a company could face risk are legal problems, management errors, and natural disasters. IT security and data breaches are also increasingly becoming a way that companies are vulnerable to risks. Risk management has to be aware of the different ways a company is susceptible to problems and the best ways to avoid those problems.

A problem that is big enough can cause a company to lose customers or in the worst-case scenario, to shut down completely. Both options can be avoided with a good risk management team that knows how to spot problems before they begin.

HOW RISK MANAGEMENT WORKS

When it comes to something as complicated as knowing what and when risks are likely to affect a company, many different strategies can be used to help gauge that risk. Many of these strategies can be used together and for calculating different kinds of risk. Anyone assessing risk should familiarize themselves with these different strategies and use them appropriately.

Assessing risk attempts to answer four basic questions about what is happening:
1. What can go wrong? Both for the company and individuals.
2. How will it affect the organization if the risk were to happen?
3. What can be done to avoid the risk?
4. If something happens, how will the company pay for it? Either financially or otherwise.

Answering these questions means looking at the company in different ways with different focuses and lenses. Context is key to understanding how the company operates and how certain risks will affect the company. This is the structure of how risk will be assessed.

Once any risk has been determined, risk management involves finding a solution and following up on that solution. This involves more than ensuring that a potential solution is implemented but that the solution is effective. Risks change constantly so a solution now may not be a solution in the future.

RISK MANAGEMENT APPROACHES

There are four main methods to risk management to minimize or avoid the impact of potential risk. Each method needs to be weighed carefully to make sure that it’s the right option. One of the most important things to keep in mind when dealing with risk management is that risk can rarely be avoided and most risk management is minimizing impact.

Risk avoidance tries to avoid the potential of risk altogether. This is done to fight off as many potential risk factors as possible. IT and computer software risk management are often seen as risk avoidance since the risk of systems being hacked is so high. For stores making sure that walkways are clear of water and ice is also risk avoidance.

Risk reduction attempts to reduce the damage that risks can have on a company. This can be done by adjusting certain aspects of a project plan or process. The scope of a company can also be a factor in reducing the risk that a company faces.

In some cases sharing the risk among different departments or even outside vendors can reduce the impact on the company overall. When multiple departments or vendors are dealing with the same problem, it can stretch the impact out and reduce how it affects the company.

With some risks, a company may decide that the impact of the risk is cheaper than avoiding any impact. With risk retaining, the company decides to deal with any potential fallout and damage from the risk at hand. This is common to see when companies choose to manage risk through lawsuits rather than removing the problem.

All of these methods have potential downsides, either from the resources spent on avoiding the risk or from dealing with any fallout. Many companies use all of these methods at various times depending on what the risk is and the cost of said risk. All companies should be aware of how to implement these methods and the cost of each method.

LIMITATIONS OF RISK MANAGEMENT

Risk management can be expensive. While it is an important part of running a company, gathering the data necessary and monitoring risk requires a lot of money and time. The success of determining risk can also be dependent on the expertise of the people running risk management.

Once the data is received and analyzed, it’s not guaranteed to be reliable. Interpreting data is complicated and readers can miss or misread something. It’s also not possible to account for every single risk that can impact a company. Problems are constantly evolving and it’s often difficult to know what caused a problem until it happens.

Solutions can also have a bigger impact than the risk would have had. Changing one small part of a company can create a butterfly effect that impacts the whole team or organization. Adapting to these changes can create bigger problems than the risk it was created to avoid.

Using risk management can also create a false sense of control. It can make a company feel like it’s unstoppable because they have calculated and avoided any potential risks. No company can avoid risks altogether. Since risk management looks at the past, not the future, this means that avoiding novel problems is harder. Hindsight is always 20/20.

Even with these limitations in mind, having risk management assess problems and work to avoid risk is a valuable aspect of running a company. It may not be possible to avoid every problem, but knowing what to look for can help avoid many problems.

SUMMARY

Risk management is the process of assessing and calculating various risks to a company. There are different strategies and methods to use to avoid risks. Even with the limitations of risk management, it is a valuable tool to use to avoid damage and problems to a company.

About the author

Nick

Co-Founder of Lisnic.com 🔥 & Founder of 12 digital agencies 🎯
View Profile

Want to know anything else?

We’re an open book so hit us up if we’ve missed anything here or if there’s something else you’d like to know.