Risk is a calculated chance of something going wrong. It’s an event with both a probability and the potential for loss or damage.
When referring to business risk, it is the possible negative impact and consequences to the company of an event or a decision that is made.
There will always be risks to a certain degree in business that every organization must face to achieve its goals.
It is required for the growth, development, and profit of a business.
Luckily, effectively managed risk provides great pathways to success for your institution.
Risks can come from multiple different sources including:
It can be confusing to have all of the different types of risk in the world to choose from, but you will always want to take a gradual and well-planned approach to manage these different terms.
Risk management, risk assessment, and risk analysis are all three closely related processes that help reduce the threat of possible risks in any given situation.
The main difference between these three is scope.
Risk management is a process where you identify what could go wrong, then take steps to prevent it from happening.
It is the macro-level process for creating a strategy to analyze and properly mitigate risk to a company’s assets.
It involves identifying analyzing, evaluating, and prioritizing current and potential risks the company may face.
By doing this, you can address potential loss exposures, monitor risk control, and financial resources to mitigate the adverse effects of possible losses.
There are five steps in the risk management process:
Example of the risk management process
An example of the risk management process is when a company evaluates the chances of major liabilities and decides whether to purchase insurance or not.
What are the types of risk management?
The main methods to apply for risk management are avoidance, retention, sharing, transferring, and loss prevention and reduction.
You can apply these to your company to help manage any risks identified.
Why is risk management important?
Risk management is important to plan and consider risks and events before they occur so that your organization can protect its assets and future.
Proper risk management allows an organization to be more confident with its business decisions and maximize available opportunities to avoid risk.
What are risk assessments?
Risk assessment is evaluating how likely it will be that something goes wrong, as well as how bad it would be if it did happen.
It breaks down threats into categories and defines the possible impact of each risk on the health of the business.
The process of a risk assessment
Assessing risk involves using processes and technology to identify, evaluate and report any risks that might affect the company.
This process includes the following steps:
Why are risk assessments important?
Risk assessments can drastically reduce the likelihood of risks. They can raise awareness about hazards to the company and the risks they pose.
They recognize and control hazards at the company.
Assessments create awareness among the employees and compliance staff which can be used as a training tool.
Risk assessments help set risk management standards based on acceptable practices and legal requirements.
They’re also meant to evaluate the effectiveness of existing controls and how well they mitigate risk for the company.
Risk analyses determine the cost-benefit ratio of mitigating versus not mitigating specific risks–in other words, whether the benefits outweigh the costs associated with each option available to you.
Analyses are crucial to determine the significance of identified risk factors.
It measures the likelihood of hazards occurring and how the company would be able to tolerate risk-related events.
The compliance team will score the risks identified, taking into account the possibility of occurrence and the estimated impact on the company and its employees.
This allows for risks to be prioritized to help shape a strategy that can be used for mitigating them.
Qualitative analyses are subjective. They focus on identifying risks and measure the likelihood of an event occurring within the project or operations’ lifecycle and the impact it will have.
Quantitative analyses are based on verified data to analyze effects or risks in terms of costs, scope, resource consumption, etc.
It assigns a numeric value to each risk to help score them.
Qualitative risk analyses are useful for gauging the probability of risks and prioritizing them in a way that’s easier for people to understand.
Meanwhile, quantitative analyses are better for managing risks in modern projects.
It provides a better means of understanding the relationship between risk and the uncertainty that could affect a project or operations.
As it relies on accurate statistical data, that data might not be available to use.
Qualitative analyses are quicker due to the subjective approach, but quantitative allows you to quantify outcomes, clear up uncertainties surrounding qualitative analyses, set achievable targets, and assess the likelihood of achieving set goals.
Are you confident in your organization’s risk management strategy?
Do you believe your company’s risk management strategy is complete and without holes?
Do you think there are risk factors you’re missing?
Our experienced team at RADD, LLC can help you get up to speed on any risks your company might be facing and help you find ways to prevent or mitigate them.
Contact us today!