“Yes, risk is inherently subject to failure. Otherwise, it will be called "self-confidence." - Jim McMahon
Risk is the ability to lose something expensive. Values (such as physical health, social status, emotional well-being, or financial health) can be gained or lost when risk is taken as a result of a certain action or inaction, foreseeable or unforeseen (planned or unplanned). In order to competently act within the enterprise, risk managers create different risk management systems, as well as tools with which to implement them.
Definition of a concept
Risk can also be defined as intentional interaction with uncertainty. The latter concept is a potential, unpredictable and uncontrolled result. Risk is the result of actions taken despite uncertainty.
Risk perception is a subjective judgment that can vary from person to person. Any undertaking carries a certain danger, but some people are much more risky than others.
Economic risks may manifest themselves in lower incomes or higher expenses than expected. There can be many reasons, for example, rising prices for raw materials, expiration of the construction of a new operating enterprise, disruptions in the production process, the emergence of a serious competitor in the market, and the loss of key personnel. Change of political regime or natural disasters.
Preparing for a risk management program
Learn the basic steps of risk management and take appropriate control measures or countermeasures to reduce the likelihood of their occurrence. Hazard reduction must be approved by the appropriate management level. For example, the risk associated with an organization’s image must be taken by senior management, while IT management will have the authority to make decisions about the threat of a computer virus.
A risk management plan should offer applicable and effective security measures for risk management. For example, the observed high risk of computer viruses can be reduced by acquiring and implementing antivirus software. A good risk management plan should include a schedule for monitoring and those in charge.
According to ISO / IEC 27001, actions taken immediately after a risk assessment is completed consists of preparing a plan that should document decisions on how to minimize it. Risk reduction often means choosing safety measures that should be documented in the Statement of Applicability, indicating the specific methods and means that were chosen for this and why. For effective risk management in the organization, all steps must be performed in the sequence proposed below.
Identification and analysis of risk (First stage)
This is the initial stage of risk management. It consists in the awareness of the specificity of the threat and the place of its possible manifestation. Under the identification and analysis of risks is understood the study of its specificity and characteristics, which are due to their nature and other features characteristic of this particular case. It is important to study future losses, as well as changes in risks over time, the degree of threat relative to a specific period. Without these steps, a risk study cannot be performed with maximum efficiency.
As part of the identification and analysis of risks, the manager must answer some questions related to them, for example:
- What is the source of risk?
- What will you have to work with when performing a risk?
- How and how much information will be received?
- How can minor risks affect significant ones and vice versa?
- What risk management strategies can be used?
This stage is very important, and this is not only because of the peculiarities of risk management, which was considered earlier, but because of the information base. This step gives the manager reliable information about the risk, its possible side effects and implementation, and also allows you to evaluate the threat itself, its parameters, the amount of possible economic losses and other indicators necessary to make a decision on managing it. In practice, this stage provides a reliable informational basis for the manager to calculate all the risk.
It should also be borne in mind that after completing the following steps, this base may become larger, which will result in constant information growth. Therefore, it is necessary to observe the sequence of stages of risk management.
Search for other methods and methods (Second stage)
The main goal of this stage is to study the tools that will prevent the manifestation of risk, as well as to study its negative impact on the functioning of the state, legal or natural person or enterprise. There can be a lot of these tools, and they can be different, but the manager dwells on the main ones:
- How can risk be mitigated with ongoing insurance events?
- How to get minimal financial damage when realizing the risk?
- What financial sources will be able to compensate for financial damage if it occurs?
For each type of risk, a special approach and management plan will be needed.
Finding Management Tools (Third Stage)
At this stage, the manager forms and selects an individual approach to risk within the organization, state or private person. The necessity of this selection procedure is associated with the different effectiveness of risk management methods and the different size of resources that are required for their implementation. The main issues that the manager decides at this stage:
- Which management method will be safer and more beneficial for the organization?
- Will the overall risk threat change in total when performing several methods to minimize them?
- Will any risk management strategies be effective?
When choosing a threat management method, the manager must consider:
- the effectiveness and need for risk, as well as the management method in the face of financial constraints;
- whether a separate threat and its management method will affect the total number.
When choosing a risk and its management method, one should always consider financial constraints and try to optimize losses. The criteria may be different, for example, with the aim of increasing the financial efficiency of the enterprise.
One of the main tasks of the manager at this stage is the correct approach and the use of various tools to solve not all risks, but those that bear the greatest damage to the state, organization or individual.
In some conditions, such as a very limited budget, the manager may ignore minor risks, but provided that they are really not capable of causing much damage. In this situation it is usually said that an active struggle has been introduced to serious risks, and a passive one to insignificant ones .
Beginning of the implementation of the risk management method (Fourth stage)
At this stage, the manager should begin to implement the methods adopted by him earlier. So, in the framework of this process, various kinds of changes are applied, for example, financially or technically. The peculiarity of the actions that are performed by the risk manager is not how they will affect the company, but how they will be performed.
This is due to the implementation of risk management methods, which forces the manager to answer a number of questions on the implementation of his strategy:
- What risk actions need to be taken?
- What time and how long will they take?
- What kind of resources and in what quantity will be involved in carrying out these measures?
- Who will monitor the quality of the events and who will be held responsible for their failure?
Analysis of results and improvement of risk control methods (Fifth stage)
This stage is the final stage for the risk manager, since on it all actions related to the threat are completed, and the main task is to analyze the outcome and improve the risk management system. This stage is very important for the organization, since after it it can take risks and manage them without the participation of managers.
At this stage, the specialist should answer the following series of questions:
- Can this system be called effective and how does it cope with its task?
- When working, did weak points appear, in which place?
- What factors have most affected the implementation of the risk, should this be the reason for making changes to the whole system?
- Were all the measures taken correctly and affected the protection of the company from financial damage, should they not be replaced by more effective ones?
- Was the internal control and risk management system flexible enough, how did it fulfill the role of protecting the company from them?
At this stage, there will be a maximum increase in information related to risks and methods for its management and maintenance of optimization within the organization.
After analyzing all the outcomes and monitoring them, a verdict is issued on whether the measures were effective. This operation is complicated in that while the risk analysis is ongoing, it does not bring financial returns, that is, it is not realized, but the organization still incurs losses associated with the management program. Therefore, it is often necessary to compare real costs with hypothetical losses.
This assessment of risk stage management carries a very important task: to figure out how to prepare the organization for more serious threats in the environment and minimize their impact on the company.
How to manage risk
Risk management is the identification, assessment and setting of priorities with the subsequent coordinated and economical use of resources to minimize the threat.
The main stages of the business risk management process can be performed in the following sequence:
- Identify, characterize threats.
- Assess the vulnerability of critical assets to specific risks.
- Identify the hazard (that is, the expected likelihood and consequences of specific types of attacks on specific assets).
- Find ways to reduce these risks.
- Prioritize mitigation measures.
How to manage risks
In practice, the process of assessing overall risk can be complex and balancing the resources used to mitigate threats should be aimed at reducing losses.
Intangible risk management is a new type of threat, the probability of occurrence of which is 100%, but the organization ignores them because of the inability to identify. For example, when insufficient awareness is applied to a situation, there is a risk of knowledge.
The threat of relations arises when ineffective cooperation occurs. The risk of involvement in the process can be a problem when inefficient operating procedures are applied. These risks directly reduce the productivity of brainworkers, profitability, profitability, quality of services, reputation, brand value, and revenue quality. Management of intangible risks allows you to create immediate benefits from their identification and minimize the consequences.
Similar difficulties occur in the allocation of resources. This is an idea of opportunity cost. Resources spent on risk management could be contributed to more profitable activities. Again, perfect risk management minimizes costs (or labor, intellectual resources), as well as to reduce their negative consequences.
According to the definition of risk, it is the probability that an event will occur and adversely affect the achievement of the goal. Therefore, it itself has uncertainty. Risk management can help managers better control the situation. Each company may have different components of internal control, which leads to different results. For example, the structure for ERM components includes the internal environment, goal setting, event identification, risk assessment, response to it, control actions, information and communication, as well as monitoring.
Commercial risk, as well as production risk, according to many experts working in labor protection organizations, is important not only for its assessment, but also for real events that occurred at the plant. It can also be classified as short-term or operational risks, which affect the return on assets and include price, costs and productivity. Business risks are relatively easy to manage, since there are clear approaches to managing them, and they have little or little chance of occurrence.
We examined the concept of financial risk and the steps for managing it.