What is risk management? The importance of risk management in organizations
Managing an organization, company, or project requires various skills. In addition, success in a task also depends on multiple factors. Obviously, without taking and accepting risks, significant success and profit cannot be achieved, and risk-taking is always one of the most important things that successful managers need. But the question is, what increases the probability of success in risks? To what extent should you accept risk, and how should you act in different situations? Risk management answers all these questions well.
In this article, we intend to examine risk management and its types, then discuss its role in business management and the risk management cycle. Stay with us.
What is risk?
Before we examine risk management, it is necessary to explain risk. Risk is a condition that, if it occurs, can affect your business goals positively or negatively. It is important to note that risk is different from threat. Risk is an event that, if it occurs, may threaten the specific goals of a project or organization.
What is risk management?
Every business moves forward with a specific goal; naturally, you may encounter various obstacles to achieving goals. Risk management is a process that helps you identify these obstacles and face them to deal with them. In fact, with proper risk management, you can reduce risks as much as possible and reduce possible losses. It is important to note that risk management is a continuous process and needs to be reviewed periodically. These periods should be determined according to the volume of the project and the factors affecting it and can be from one month to even one year. On the other hand, risk management is only for companies and can also be part of self-management.
What are the stages of risk management?
As we mentioned, risk management is a process with various stages that must be carried out completely and correctly. Risk management consists of the following three stages.
Identifying risk factors
In this stage, you should identify all the obstacles to achieving the project goal. Some of these risk factors can change the course of your project in general. Therefore, you should identify these factors before doing anything, and this stage is critical in risk management.
Analysis
In this stage, you should examine the obstacles you have found entirely and comprehensively to find suitable solutions for them. You should analyze risk factors for proper risk management. You should predict when you will encounter them and determine your reaction to them. The existing resource management team should do this analysis.
Anticipating the response
In the final stage, you should decide what to do about possible risks. One significant advantage of the risk management process is that it allows you to predict the future to a large extent. This prevents you from being overwhelmed and acting hastily when faced with risks and obstacles because you have already prepared a plan to deal with these events and know exactly what to do.
What is the level of resilience in risk management?
Another concept you need to be familiar with is resilience in risk management. Risk resilience means to what extent the organization or business in question can maintain its essence in the face of threatening risks. If the risk management process is carried out and progresses correctly, the level of resilience should increase over time. If this does not happen, the risk management process will not be carried out correctly.
What are the types of risks?
The risk management process is general and related to the types of risks that an organization or project may face.
Some types of risks a project may face include the following.
Financial risks
The amount of capital available and proper management are among the most critical factors in advancing various projects. Risk management can help you properly evaluate and manage capital-related risks such as interest rate risk, debt level, cash flow, inflation, asset value, etc.
Safety risks
Safety risks refer to a set of risks that, if they occur, may put the health of customers or employees at risk. Some essential safety risks include fire, severe weather changes, theft, etc.
Legal risks
Your organization or project must follow rules in any field it operates in. If these laws are violated, legal risks arise, which may even be accompanied by penalties. For example, waste disposal laws, tax payments, and tax exemptions can be mentioned.
Strategic risks
Some risks can fundamentally put a business at risk. Some types of strategic risks can include changes in supply and demand, strengthening the competitive market, management changes, and social trends.
Operational risks
As their name suggests, these risks can arise due to changes in an organization’s routine operating processes. One simple example is general worker strikes.
Environmental risks
Environmental risks can arise due to possible changes in the environment. Environmental hazards include climate change or political changes related to transportation, environment, agriculture, health, energy, industry, etc.
What are the types of risk management?
Just as there are different types of risks, there are also different types of risk management. Some types of risk management are defined as follows.
Financial risk management
This type of risk management examines financial issues that can affect the project. Credit risks can arise for various reasons, including loan debt, customers’ unpaid debts, or changes in bank interest rates. Hiring a financial manager can help you manage risk better.
Project risk management
In this process, all risks that threaten a project from its beginning to completion are examined and evaluated, their possible impact on the projects is determined, and an appropriate decision is made.
Strategic risk management
This type of risk management is related to examining and managing strategic risks. For example, competitive conditions, the status of competitors, changing technologies, and changing market needs are among the strategic risks that need to be followed up on.
IT Risk Management
IT risks can include data security and privacy breaches, cyber-attacks, etc. In this type of risk management, these risks are examined, and various measures, such as the use of security and protection tools, the establishment of control processes, employee training, employee empowerment, and security measures, may be used to deal with them.
Why is risk management critical?
Risk management is essential for various reasons. Some of the most important reasons that can be mentioned in response to the importance of risk management include the following.
Improving the reputation of the organization
Many organizations have a strong reputation, which is essential for them. Risk management can significantly contribute to maintaining this reputation better by predicting the future and possible conditions.
Minimizing losses
If done correctly, risk management can significantly prevent losses and reduce their amounts as much as possible if they occur.
Organizational progress and growth
Risks can positively or negatively affect your business. The risk management process helps you minimize losses and take advantage of profitable opportunities. Strong and principled risk management will progress and grow your business or organization over time. These things will lead to better economic growth for the company.
Strengthening decision-making
You may be interested in the fact that as crucial as risks are, decision-making against them is also essential. Risk management allows you to take proper and timely risks, weigh all aspects, and choose the best decision. However, in the absence of risk management, you will be in a dilemma when facing risks and will be forced to act hastily and choose decisions that may be wrong and worsen the situation.
What is the risk management cycle?
There are many methods for risk management. However, the most famous is according to ISO standards, which include the following five steps.
Risk Identification
In this stage, all the potential hazards and risks for the organization should be identified.
Risk Analysis
This stage is related to reviewing and assessing risks, and you should review the various risks comprehensively.
Risk Prioritization
In this stage, estimate the chance of each risk occurring to some extent and examine the percentage of their impact on the main objectives of the project or organization. This will help you first to consider the more essential items. The greater the risk, the higher the priority. For example, if a risk is likely to cause bankruptcy, it should be placed above all priorities.
Eliminating or Reducing the Chance of Risks
In this stage, you should take action to reduce adverse risks. If possible, reduce the chance of risk to zero and eliminate it; if this is not possible, reduce the chance as much as possible.
Monitoring the outcome
Risk management requires ongoing monitoring and review and should be reviewed regularly.
What are the solutions and strategies used to manage risk?
Some of the most important strategies to deal with risks include the following.
Risk avoidance
In this method, you should avoid high-risk tasks and actions. This can be done permanently or temporarily. In fact, in some cases, the manager prefers to eliminate risky functions for a certain period to ensure the safety and sustainability of the desired project and its goals.
Risk reduction
In this method, the organization accepts the risk and focuses all its attention on reducing the risk and potential losses. One example of this method is insurance organizations’ provision of preventive services.
Risk transfer
Risk transfer is also another method that is used in some cases. This can increase the organization’s resilience in times of need.
Accepting Risk
In some cases, you may be forced to accept risks. In these situations, you should focus on managing and minimizing losses.
What is investment risk management?
Investment risk management allows the investor to examine various investment methods, including their benefits and drawbacks, and choose the best investment method.
Conclusion
Risk management is one of the most critical issues affecting a project’s progress and goals. It requires not only sufficient knowledge but also sufficient experience and skills. Modern technologies and artificial intelligence can also be used in some parts of risk management today. Remember that risk management, if done correctly, can improve decision-making, significantly reduce losses and losses, increase profits and benefits, and add to the credibility of the organization and the project.