Risk Management, Risk Structure, and How to Respond to it

In running a business, there will definitely be risks that must be faced. Various kinds of risks from all aspects related to business can occur in the future. Wisdom and caution in running a business is a must, but sometimes risks can arise from parties or things that you cannot control.

Risk management is an important thing to be discussed and carried out in a business for the smooth and development of your business. If implemented properly, you can prepare plans and even actions to be taken if faced with a risk in the future.

What is risk management?

Risk management is what is done for the purpose of identifying, analyzing, and responding to risk factors that are part of a business. Effective risk management seeks to control as much future outcomes as possible by acting proactively rather than reactively. Therefore, effective risk management offers the potential to reduce the likelihood of a risk occurring as well as its potential impact.

Threats or risks can come from a variety of sources, including financial uncertainty, legal liability, mismanagement of strategies, accidents, or natural disasters. In an effort to reduce risk, a business needs to apply resources to minimize, monitor and control the impact of negative events while maximizing positive events.

The structure of risk management

The risk management structure is designed to do more than just show the risks that exist. A good management structure must also take into account uncertainty and predict the effect of risk on the business. A business will be faced with two choices, namely accepting the risk or rejecting it. Acceptance or rejection of risk depends on the level of tolerance applied to the business.

When a business defines risk management as a disciplined and ongoing process with the aim of identifying and resolving risks. The risk management structure can be used to support other risk mitigation systems. The systems in question include planning, organization, cost control, and budgeting. In certain cases, businesses can experience many surprises, as the focus is on proactive risk management.

Responding to risks

Risk is something that cannot be avoided, but can be handled according to the situation at hand. The response to risk usually takes one of the following forms:

• Avoidance: a business seeks to eliminate certain risks by eliminating the causes.
• Reduce: seek to minimize losses, not eliminate them completely. Stay focused on containing losses and preventing spread when there is a risk.
• Split: when the risk is shared, the possible loss is transferred from the individual to the group. Usually applied to a company with several investors raising capital so that each bears some of the risk if there is a possibility that the company will fail.
• Transfer: contractual transfer of risk to a third party, such as insurance.
• Mitigation: lowering the projected financial value associated with a risk by reducing the likelihood of the risk occurring.
• Accept: in some cases, the business may be forced to accept the risk. This response is possible if the business entity develops the possibility to mitigate the impact of the risk if it occurs.

When predicting a possible future risk, businesses need to engage in a problem-solving approach. The result is a well-detailed plan that can be executed as soon as the need to respond to the risk arises. Such a plan will allow a business to deal with the bottlenecks at hand because they can deal with risks as soon as they arise.

The importance of risk management

Risk management is an important process because it empowers businesses with the necessary systems so that they can identify and adequately address potential risks. Once a risk is identified, it is easy to reduce it. In addition, risk management provides businesses with the knowledge base to be able to make sound decisions.

For a business, risk assessment and management is the best way to prepare for the possibilities that will occur in the effort to progress and grow the business itself. When a business evaluates its plans to address potential threats and then develops a structure to address them, it increases its chances of becoming a successful entity.

In addition, progressive risk management ensures that high-priority risks are dealt with as aggressively as possible. Management will have the necessary information so that it can be used to make informed decisions and ensure that the business remains profitable.

The process of risk analysis

Risk analysis is a qualitative problem solving approach that uses various assessment tools to work and rank risks with the aim of assessing and resolving them. Here is the risk analysis process:

1. Identifying risk

Discussion is needed in an effort to identify risks. A business brings its employees together so that it can review all the various sources of risk. The next step is to list all the identified risks in order of priority. Since it is not possible to mitigate all of the existing risks, the priority is to ensure that the risks that could significantly affect the business are addressed with greater urgency.

2. Assessing risk

In many cases, problem solving involves identifying a new problem and then trying to find an appropriate solution. However, before knowing how to best deal with risk, a business must find the cause of the risk through the question, “What causes the risk and how can it affect the business?”.

3. Develop a correct response

Once a business is established to assess possible remedies to mitigate the identified risks and prevent their recurrence, it is necessary to propose to think of actions that can be taken to prevent the risks from reoccurring. Don't forget to discuss the best thing to do if the risk recurs.

4. Develop preventive mechanism in identifying risk

Ideas deemed useful in reducing risk can be developed into a number of tasks. This task can then become a plan if there is a possibility of a risk occurring in the future. If the risk occurs, the plan can be implemented.

Of course there are various types of business that have risks that must be faced. These risks can then affect the survival and growth of your business. Therefore, it is important to understand the basic principles of risk management and how to apply these principles to help reduce the impact of risk on the business entity you are running.

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