Every business organization faces risks on its path to success, and this is why it is a best practice to protect the interest of the business organization. There was the need to define and control certain policies to minimize risks by risk management. This is why we have what is known as Fundamentals of Risk Management.
“Fundamentals of risk management” is therefore, a concept which is best described as the basics of risk management. In order to understand the fundamentals we need to understand Risk Management.
This has been defined as the actions which are incorporated into the policies of any organization, company or business institution. These actions are directed towards evaluating and determining the likely risks attached and elaborating the course of action necessary to manage the risks.
Classification of Risks
There are three main classes of risks organizations face.
1. External Risks: These are risks related to unfavorable changes in laws, market conditions, or changes that instead favor competitors.
2. Operative Management Risks: These are risks attached with losses due to poor skills, physical injury to persons or due to environmental hazards.
3. Financial Management Risks: These could be problems with accounts receivable, exchange rates being unfavorable or imbalanced liquidity.
Best Practices in Risk Management:
This is an 8 step process which is summarized as follows:
1. Defining the Context: This is the process of best practices for:-
a. Identifying the risks.
b. Scheduling the activity
c. Distributing duties and responsibilities.
2. Identifying the Risk: This entails profiling the risk. The factors to be considered for best practices by the organization during this include:
a. Objective to be achieved
b. Circumstances it may encounter
c. Vulnerabilities of the management.
3. Assessing the Risk: This involves probabilities of the risk occurring in the first place. Things to be used in determining the probability include:
a. Potential of the source of the risk
b. Seriousness of the risk.
4. Treating the Risk: This is the approach to be taken to handle the risk identified. The following courses of action in best practice need to be observed:
a. Transfer the risk
b. Excluding the risk
c. Reducing the risk
d. Accepting the risk
5. Planning Out: Once the mode of action to treat the risk has been decided, the best practice of planning it out requires:
a. Acquisition, Interpretation and storage of the data to control the risk.
b. Assessing appropriate level of course of action involving managerial tools and control instruments.
c. The approach to be taken
d. Sending or storing the output data from the control process.
6. Communication: Once the plan has been laid out it is important to involve the people who will face consequences of the risk, and who are involved in risk management overall. They must be informed about the situation on ground and approaches which will be taken.
7. Overseeing and Inspecting: There will be the need to monitor and supervise the entire process at every stage.
8. Review the Process: This is the last stage of risk management. It involves evaluating the effectiveness of the whole process of risk management to analyze how productive it was.
In this section we will discuss: