Risk Management Definition – In running a business, of course, we will never be free from facing unexpected risks such as natural disasters, theft, losses, etc.
Of course, this can harm your business or even cause your business to fail.
This is where the importance of risk management is to prepare your business from unexpected things and minimize additional risks and costs before they occur.
Taking into account the potential risks before they occur by creating a risk management plan can certainly protect the future of your business.
Understanding of risk management
What is the understanding of risk management?
The definition of risk management is a process to identify possibilities, measure risks and create strategies to manage risks before they occur.
With risk management, it allows business owners to regulate procedures to avoid these risks and minimize their negative impacts and overcome them.
Therefore a business must make a realistic evaluation of potential risks and plan properly.
Stages of risk management
1. Identification of risks
This stage is a stage to identify possible risks that occur in business activities. Making accurate risk identification is the most important step in risk management.
At the risk identification stage, you can list as many possible risks as possible.
Some ways you can use to identify risks include:
2. Analyze risks
The next step after you have identified the risk is to do a risk analysis by looking at the possibility of the risk occurring and the amount of loss incurred.
By measuring these risks, you can find out how to overcome these risks or minimize the potential for these risks to occur.
To determine the possibility of the risk occurring is classified as subjective and based more on experience and intuition.
Although some risks can be measured but ensure the potential risks occur are very difficult.
So that at this stage it is very important to determine the risks that have the most potential to occur so that we can determine risks that will be prioritized in risk management.
3. Risk management
“Inevitably” a business will always be faced with risk because a risk is part of the business
The thing that can be done by business people is managing to minimize the occurrence of these risks.
Some ways to manage risk:
- Risk avoidance / Risk Mitigation: do not carry out activities that can create potential risks. When you have to do these activities then you must consider the potential benefits or losses that can be caused.
- Risk reduction: a way to reduce the potential for risk or reduce the negative impact of a risk.
- Risk transfer: move risk to another party, for example through an insurance contract.
- Risk difference: when you face a potential risk that is not constant then you should delay to carry out an activity until the potential risk has a small chance of occurring.
- Risk retention: even though some risks can be eliminated or reduced but some risks cannot be reduced or eliminated so they must be faced as part of business activities.
4. Application of risk management
After we carry out the stages of risk management above, the next step is the implementation of planned risk management.
5. Conduct evaluation
After you identify, analyze and implement risk management, the most important thing is to evaluate the risk management that has been implemented.
Conducting risk evaluation and monitoring is very important, starting from the identification stage to implementing risk.
With this monitoring and evaluation, you can find out the effectiveness of a strategy in responding to the risks that occur.
So when the risk occurs again you can respond quickly to overcome it.
Risk management objectives
Here are some risk management objectives:
- Analyze and manage all risks (financial, human, information systems, strategic risks) to avoid vertical segmentation effects and all potential impacts of these risks (financial and non-financial impacts such as reputation, knowledge).
- Remind the Executive Board of the potential risks and risks that are considered unacceptable.
- Propose and coordinate the launch of an action plan designed to reduce or change this risk profile.
- Helps to disseminate best practices and risk management culture in FRR.
- Provide an independent opinion to the Executive Board on the management index chosen by the Finance Division of the Fund for its own management.
- Propose or validate the risk threshold based on the main risk types or areas of activity.
Types of risk management
In running a business, of course, we will always be faced with various kinds of risks that can cause losses and even bankruptcy.
Therefore, every company should have good risk management to overcome these risks systematically.
The following are the types of risk management:
1. Strategic risk management
Almost everyone knows that a successful business requires a mature and comprehensive business plan.
But in reality, a mature plan can sometimes change very quickly because of many things.
This is where the importance of strategic risk management is to help decision making due to unexpected conditions so as to make business planning not work well.
Some conditions that can make a business plan do not work well include changes in technology, the emergence of new competitors, rising prices of raw materials, etc.
2. Operational risk management
Many people think that company risks arise due to external factors. Even though internal factors within the company are also a source of risk but are often forgotten.
This risk arises as a result of unexpected failures from your company’s daily operations such as employee errors, server damage, power outages, etc.
Although operational risk seems small compared to strategic risk, the impact that can cause is very large for the company.
Not only costs to fix these problems but operational risks can affect the overall operations of the company.
Of course, this can make the company’s way to be hampered.
3. Financial risk management
The main impact of the impact of risk is the company’s financial impact due to additional costs or loss of income.
However, this financial risk refers to money that flows in and out of your business and has the potential for financial loss.
To manage this financial risk, the company must form a financial risk management team.
Therefore, the financial risk management team is an important part of a company because accountants will always consider various potential risks related to financing.
Some financial risks:
- Market risk: This type of risk arises due to stock price movements, interest rates, and many other causes.
- Credit risk: this type of risk arises from a company or someone failing to fulfill obligations to a third party.
- Liquidity: this type of risk is present due to the inability to carry out transactions such as the seller’s inability to fulfill orders.
- Operational: risks arising from operational failures such as technical failure. Examples of fraud risk due to lack of control.
- Legal risk: this type of financial risk arises due to legal restrictions such as lawsuits so that companies experience financial losses.
4. Management of reputation risk
In the business world, the company’s reputation is an important part that cannot be separated from the company.
Just imagine the company’s reputation has been damaged and no longer trusted by customers. Of course, this can make you lose customers because they are worried and hesitant to transact with your company.
The adverse effects of damage to the reputation of the company that affects the mental decline of employees and make employees leave the company.
Some of the above cases can show the importance of reputation risk management.
5. Compliance risk management
Does your business comply with all applicable regulations and laws?
I hope your business has complied with all the regulations and laws that apply today.
But problems will arise due to changes in regulations or legislation at all times and you will always have the risk to deal with it in the future.
Whether your business is not yet developed or has developed, you still have the potential to face compliance risk by expanding your business.
This is where compliance risk management plays a role in keeping your company managed and running in accordance with existing laws and regulations.
Such is the brief discussion about risk management definition, stages, and objectives.