Risk Management has become an integral part of the corporate industry. All businesses should look to minimize risks, regardless of size. SMBs (Small and Midsize Business) have as much of a need for risk management as large businesses and Fortune 500 companies. A business’s sustainability depends highly on how well a company can handle its unforeseen events; they can only address these events when they have a risk management strategy in place. So – what is risk management?
Risk Management Definition
Risk management is a 2-part process that includes understanding the risks associated with a business and devising a strategy to mitigate or minimize those risks. The goal? To capture a higher value out of company operations. Both external & internal risks are crucial to identify. While internal threats are easier to take control of as compared to external risks, knowing where the most significant vulnerabilities lie can prove critical in the long term to reduce the probability of unforeseen costs. Having a risk management strategy in place also allows an organization to make informed decisions with an eye on its operational success.
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Risk Management Examples
Project Risk Management
Project risk management pertains to identifying and minimizing risks associated with a project to achieve a desirable outcome. PMs identify, evaluate, and tackle these risks by keeping the project’s objective in mind. Project risk management does not only define an adverse risk; a project risk can also be a future opportunity. Project risk management can involve risks as simple as a budget risk which can cause cost overruns.
Financial Risk Management
Financial risk management is about assessing the risks on investments and business ventures. As the name suggests, financial risk is the risk of losing the capital invested by stakeholders. Financial risk comes in many forms, such as market risk. For example, for a small grocery retailer during the pandemic, the trend of consumers buying online – bypassing physical retail stores – is a market risk. Adopting the rising trend is an excellent strategy to face this financial risk. Businesses need to assess their dealings through financial risk management models to minimize credit risks. Taking on high levels of debt also poses a financial risk for companies, so they need to manage their risk by keeping low debt levels.
Operational Risk Management
Operational risk exists for every business. This risk stems primarily from the functions of the company itself. Many risks associated with operations such as natural causes (earthquakes or hurricanes) can destroy a business’ assets and properties. Internal fraud by employees is another example of an operational risk. Operational risk management is to understand the organization’s own risk culture better and implement best practices to avoid operational risks.
Supply Chain Risk Management
Supply chain risk management is performed to prevent supply chain disruptions. It involves identifying risks that could hinder the distribution channels. Supply chain risk management can identify demand trends so that unpredictable demand is met. Internal factors such as workflow being disrupted can cause manufacturing concerns and hinder the supply of goods. Supply chain risk management identifies all the risks beforehand to minimize their impact or have a contingency plan in place to deal with such risks.
IT Risk Management
Data being the new oil of the modern age is an asset to an organization. Nowadays, IT risk management is mostly about protecting confidential data that is stored on IT infrastructure. Companies employ the latest software and technologies to protect their data and promote data protection practices in their company culture. For example, employees should not share their log-in data with people outside the company as this poses an IT risk.
Risk Management Framework
A risk management framework is crucial to every organization. The framework can assist in daily activities and functions by integrating risk management policies. The leadership of an organization needs to play an essential role in risk management. They should be able to implement all components of the risk management framework in their objectives and strategies. If adopted from the top down, a culture promoting the framework will help implement efficient risk management policies.
Integration of the framework’s policies in the organization’s day-to-day practices is an integral part of the risk management framework, ensuring all associated departments and operations are aligned with the risk management policies. Internal factors such as the mission, values, and vision of an organization need to be integrated into the risk management framework. After implementation, organizations should assess if the risk management framework has been effective. Continuous improvements should be identified and implemented.
Risk Management Plan
The below 5 steps make up a comprehensive risk management plan for companies:
- Identifying risks initiates the risk management plan.
- A ‘What-If’ Analysis on the impact of the associated risks is performed. If the risks pose low opportunity cost / high failure cost, avoid those risks at all costs.
- A Response Plan is devised involving planning sunk costs and mapping out all sources of the risk.
- A Lead is assigned to the risk regarding the project/venture. All stakeholders should approve this before implementation.
- A back-up plan to act on unforeseen circumstances should also be created.
Risk Management Tools
One of the most widely used Risk Management tools is SWOT Analysis. Businesses determine the risks taken considering the strengths & weaknesses of the operation. Opportunities and threats will outline the impact of those risks and then the business has to choose the risk(s) they would like to take, and the ones that need to be mitigated through the SWOT process.
Another tool is tracking the risks associated with a project through a spreadsheet. As the project goes on, the impact of the risks are calculated This way, the entity knows when to act on potentially harmful risks.
Risk Management Tools are derived from the study of statistics, and probability is one tenet that does not leave the side of Statistics. A Probability & Impact Matrix is an effective but complex tool for this type of assessment. This tool calculates the probability of the risks occurring. It then ranks them on the severity of the risk impacting the project in a broader sense, which helps identify critical risks.
Risk Management is an essential topic in the age of Data and Analytics. Every company produces large amounts of data that can be utilized to understand various risks associated with their operations. Companies that understand the risks associated with doing business are able to minimize them, which gives them a competitive edge in the market. With current computing technology, SMBs can effectively employ Risk Management techniques for a sustainable future!
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