The process of recognizing, assessing, controlling, and responding to threats to an organization’s capital and earnings that occur during a business’s life cycle is known as risk management. According to ISO 31000, risk management process is a “systematic application of management policies, procedures and practices to the tasks of communication, consultation, establishing the context, identifying, analyzing, evaluating, treating, monitoring and reviewing risk”.
The chance of the risk occurring multiplied by the severity can be used to calculate the size of the risk a company faces. Financial uncertainties, legal liabilities, strategic management failures, accidents, and natural disasters are all potential sources of risk or threat.
All firms and organizations are at danger of unanticipated/harmful events that can cost them money or force them to close permanently. Risk management enables businesses to prepare for the unexpected by reducing risks and additional expenses before they occur. Risk management strategies and processes include the following:
- Establishing context
- Identifying the risk
- Analyzing the risk
- Evaluating and assessing the risk
- Mitigating the risk
- Monitoring the risk
- Communication
The following questions should be addressed by these strategies: What could possibly go wrong? What impact will it have on the company? What precautions may be taken to avoid the loss? What can be done if a loss occurs?
What are the benefits of risk management?
A risk management strategy assists an organization in determining the risks it faces, reducing the possibility of those risks, and providing a framework for better decision-making to minimize future risk.
Importance of a risk management plan
• Implementing a risk management plan and addressing various potential risks or events before they occur will help conserve resources such as assets, revenue, property, people, and so on.
• Having a solid plan in place will assist an organization in establishing procedures to avoid potential dangers, reduce their impact if they do occur, and handle the consequences, all while protecting its public image.
• Organizations can be more confidence in their business decisions if they can recognize and handle risk.
• It provides a secure and safe working environment for employees and customers.
• It improves business operations’ stability while also preventing or reducing legal liability.
Residual Risks
Residual risks are the threats that remain after all controls to identify and eliminate the risks have been put in place. There are four ways to deal with residual risks:
- Avoid the risk
- Transfer the risk
- Mitigate the risk
- Assume the risk