The biggest problem is that the risks a business face can not be totally removed. There are tools, strategies, and software available to assess and minimize the risk. However, completely eliminating risks is very difficult.

Nevertheless, in order to tackle it better, it is important to be well-aware of all the types of risk. For a better understanding, explained below are two main categories of risk.

Strategic

The risks that arise from the basic decisions that managers take concerning a business’s objectives are called strategic risks. Essentially, the failures to achieve these business goals are strategic risks.

There are ‘business’ and ‘non-business’ strategic risks. They are mainly decided by the board’s decision. This is why all the decisions should be taken after a good amount of research and planning.

Businesses must bring into consideration the inside and the outside factors (the technical, commercial, and economic environment) when making a decision. This is why it is very important for the board to be competent and skilled.

A business must take strategic risks to continue to grow and expand its horizon. It cannot flourish and achieve its aim until it is willing to take risks.

For example: The risk of developing and launching a new product in the market is huge. There is always a danger of facing stiff competition from competitors. The technological market is another big factor, as new technology might have arrived by the time the company launches its product.

The best practice is to engage in comprehensive planning and make fool-proof plans keeping everything in mind.

Operational

Risks connected with the internal employees, processes, systems, and resources of the organization are called operational risks.

Some operational risks, such as the failure to receive material on time, can be very hazardous for a business. It is important to control them for the business to run smoothly. Understandably, the board cannot control all the operational functions. However, it is the board’s duty to make sure that there are managers or workers to make sure that everything runs smoothly.

Most big companies have a risk committee to monitor and assess risks to help control them. This includes liaising with internal audit and setting control system. It is also very important to set priorities right, and never to neglect any issue.

Due to the wide variety of operational risks, it often becomes very difficult to keep things straight. This is why organizations should have a contingency plan in place, just in case an emergency arises. Planning well and having a back-up plan, in case something goes wrong, are the best practices to control operation risks.

These are the two most major categories of risks. It is very important to understand them well and take measures to minimize the risks associated with the business.

The three controlling branches that every business has to deal with when it comes to deducing liableness are external, operative and financial management risks.

Apparent Risks

Sudden changes in the market conditions or law amendments can trigger disturbances in the balanced cash flow of a business. This can be even more harmful especially when these laws or conditions become favorable for the competition. Hence one must be prepared to deal with any sudden changes affecting the production or supply of a business.
External hazards may also include the damage of property or goods brought upon by natural elements. Disasters are mostly unpredictable and preparing your assets for such a situation is quite necessary.

Functional Management Risks

Risks associated with the workforce often include laborers with a bleak knowledge of the machines they operate. A person who is not familiar with the working process of large scale industrial machines can easily cause damage to the equipment and himself.

This damage may spread to other laborers working in the same premises including the species inhabitant in the surrounding area. For example, the dumping of toxic waste into rivers can lead to a high fish and animal mortality.

Monetary Management Risks

These risks include the manhandling of company accounts and sudden changes in the global exchange rates. Trading almost entirely depends on the rate of exchange offered by organization. Hence, if a company is unable to balance its liquidity, losses are bound to strike its doors.

Definition

It is defined as a process involving business practices that identify, evaluate and prioritize the various forms of risk.

Once managers identify risks, they can plan strategies to eliminate negative impact of risk on the business. Strategies vary according to the form of risk, which further differ depending on the type of business. In addition to this, managers have to keep standards for risk management in perspective. These standards are best practices developed by:

• The Institute of Project Management

• The National Institute of Science and Technology

• The ISO – International Organization of Standardization

• Other regulatory organizations

Forms of Risk

Risks include occurrence of unexpected and expected events and lapses in best practices. They can be physical in nature, such as fires, natural disasters and other forms of accident. Risks can also be legal issues involving sexual harassment, theft, fraud and racial discrimination. They can also be related to unpredictable financial markets, credit risks, failures in projects and problems with data management.

Objectives of RM

The objective of compliance with risk management is to guard the business. Businesses are always vulnerable. In order to ensure continuity of the business and to reduce financial risks, managers need to protect the business continuously. In addition to this goal, RM is meant to assist managers to protect their employees. Managers also have to make sure that customers and the general public are not compromised. This also provides best practices to preserve records, data and other physical assets of the company.

Identifying and Managing Risk

Risk can be identified and manages in five simple steps.

1. Define and identify risks
2. Assess the information related to the threat imposed towards assets
3. Predict consequences of the threat
4. Establish the measures to be takes to reduce the risk
5. Prioritize the management procedure to be followed stepwise to mitigate the risk

Strategies for Managing Risk

There are four categories of strategies for risk management:

• Accept the consequences and budget for the loss

• Transfer the risk to another aspect of the business

• Close down the high risk regions of the business

• Install back-up plans for foreseen risk scenarios

Every business must have plans to ensure risk management through compliance. This helps protect financial and physical assets.

1. Developing awareness about the nature of the risks involved in IT.
2. Quantitative analysis of the impact the business as a result of loss of access and data.
3. Knowledge about the range of tools available for managing IT risks.
4. Manage the cost of IT risk management to match the business value.
5. Establish a systematic and corporate approach to manage the security risk involved with IT.
   1. 1. Developing awareness about the nature of the risks involved in IT

The most common risk involved with information technology is potential loss of information. Therefore, there is need for essential best practices for risk management strategies to create awareness in employees. Recovery of lost data can be a major challenge. There are 6 categories of risk involved here:

1. I.            Risk of access by unauthorized personnel by breeching security. This is where computer crimes, cyber terrorism and internal breaches occur.
2. II.            Risk of failure to access the data if there is a system failure. This means risk of availability. The likely causes of system failure could be human error, configuration changes or lack of redundancy in the setup. There can be other causes as well.
3. III.            Inability to recover data after it has encountered a failure is a major risk. Sometimes, due to hardware, software failure, external threats and natural disasters, data is hard to recover.  So there is risk of recovery.
4. IV.            Risk of performance when information is not provided when it is needed due to certain parameters. It could be because of heterogeneity in the IT landscape, distributed architecture and peak demand.
5. V.            Risk of scalability: There is a risk that managing major new applications and business costs effectively will be a problem. This is often associated with provisioning bottlenecks in the business, slow business growth and restricted business setup.
6. VI.            Lack of Compliance: There is the risk of violation of regulatory requirements. There must be compliance with government regulations, corporate governance and internal policies.
   1. 2. Quantitative analysis of the impact the business as a result of loss of access and data

Decision makers need to assess and qualitatively plot values on graphs to assign remediation priorities. The data lost and inability to access information must be evaluated qualitatively to help in implementing risk management strategies.

1. 3. Knowledge about the range of tools available for managing IT risks

There are some specifically designed tools which are recommended for use in ensuring best practices in managing IT risks. Managers and key personnel must have knowledge about these tools.

1. 4. Manage the cost of IT risk management to match the business value

Investing in processes, technology and reformation is a requirement to achieve mitigation of risks. IT budgets can be a problem to manage which adds to the problem of IT risk management. There are best practices which ensure that organizations maintain effective and efficient IT risk management investments. By providing IT as a service management, implementing service level agreements, utilizing and reducing cost, and implementing automated IT operations to reduce costs.

1. 5. Establish a systematic and corporate approach to manage the security risk involved with IT.

Companies must develop a risk heat map which shows potential impact of the six IT risks mentioned above. Then as a best practice organizations must have a plan of approach in a systematic manner to ensure IT risk management.

In order to implement these five steps to risk management, there are steps risk assessment best practices which must be considered.

Risks are uncertain events and conditions which occur at any time. They can have both positive and/or negative consequences for any project if best practices are not implemented. This is why there is a lot of pressure on project managers to ensure that there is always a plan for anticipated and unforeseen risks. The plan must serve as a buffer to control the losses resulting from the consequences. A risk management action plan must be reviewed periodically to ensure that the project team is ready to handle all likely outcomes. This is an important best practice which project managers must implement.

The basis of any risk management plan is to include a risk strategy into the processes of any organization. Risk assessment is a necessary best practice in order to have a risk management action plan. There are four potential strategies which can be adopted for best practice in the risk management action plan.

First Potential Strategy:

• Accept the Risk: This means the organization will have to take chances with the negative consequences. It is a best practice to be ready to face consequences and a good manager will be well prepared.

Second Potential Strategy:

• Avoid the Risk: The project managers can change the action plan to prevent the foreseen problems from arising. In case of unforeseen risks as well, experienced project managers can keep a “Plan B” ready. This is a best practice only few managers’ practice and is highly recommended.

Third Potential Strategy:

• Lessen the Magnitude of Risk: There is always the likelihood and option for managers to lessen the magnitude of the risk or its consequences. Some risks must be taken for a greater good. This means one can take intermediate steps to ensure that the processes of the firm remain as less affected as possible and losses are as minor as possible.

Fourth Potential Strategy:

• Transfer the Risk: In some setups business managers can outsource the risks to a third party which can manage the negative outcomes of the risk. This best practice helps in distributing the consequences of risk.

Whichever of these strategies one follows, the basic best practices must be implemented. This includes proper documentation, analysis, communication and other processes involved. Risk management requires thorough assessments and evaluations to have a strong risk management action plan.

• Use of professional contract agreements: It is important to ensure that no work is done without a proper contract agreement. This will assist in defining the scope of services and terms of remuneration before one commences work on the assignment. When there are no defined agreements there are greater chances of misunderstandings and controversies to arise over time.
• Systematic Documentation: The main advantage of proper documentation that it facilitates tracking of changes. It is a best practice to ensure that the customers are satisfied and services are delivered according to requirements. If customers claim there are deviations from the agreements, documentation can clear any misunderstandings. Additionally, ensure that all changes are evaluated and signed-off for best practices and there are defenses against litigation.
• Reviewing Work Done: There are serious consequences when business organizations are detected with errors in records. In some cases they can be taken as reason to suspect malpractice and failure to check work productivity. Therefore designated personnel must ensure best practices and see that the assignments agreed upon are completed appropriately and there are no mistakes.
• Communication: Most common problems faced in business institutions are disgruntled customers. This happens when they do not understand the agreement or find services dissatisfactory due to lapses in the administration. In the interest of the financial institutions and business institutions it is an important best practice to ensure proper communication at every level. The administration must be aware of all necessary policies, changes and instructions regarding various processes. Therefore, maintaining a friendly and cooperative customer to employee and employer to employee relationship is necessary. This best practice will ensure proper working environments and better customer satisfaction through improvements.
• Early Resolution of Disputes: It is a best practice to be able to detect risk of disputes and sensitive issue before they get out of hand. Settling disputes at their early stages is an important solution for risk management. As mentioned above the aim of risk management is to avoid litigation. Thus clearing any misunderstandings, annoyances and complaints sooner is a recommended best practice.
• Professional Indemnity Insurance Policy: Having an up to date professional indemnity insurance policy is an important best practice. This will help business and financial institutions in protecting themselves against legal actions just in case. Therefore, ensure that the professional indemnity insurance policy relevant to the respective professionals involved is available.

There is need for risk management in all forms of businesses whether they are financial or health related. Being liable to legal action is an avoidable situation and must therefore be handled in accordance with best practices.

Those organizations which succeed in implementing these best practices achieve higher approval, lessening or evading risks to a great extent. It also involves looking over operational risks such as; insufficient or ineffective internal processes and systems, human factors and external factors. Business organizations which have not ensured best practices by implementing operational risk management have faced losses. Therefore, it is important to understand the importance of operational risk management.

There are four principles of operational risk management for best practice which are:

• Accepting the risk when benefits out weigh the cost involved.
• Avoiding any unnecessary risk.
• Anticipating and managing the risk through proper planning.
• Taking risky decisions at the right level and time.

ORM is implemented as a best practice at three forms. These stages are;

1.       In depth: This is when operational risk management is implemented before a project begins. Examples of through training, providing requirements and setting up instructions for best practice. The steps involved in ensuring in-depth ORM are:

a.       Establishing the context: Identifying the risk and its nature.

b.      Assessing the risk: Identifying the risk, analyzing it and evaluating it.

c.       Treating the risk: Finding solutions to manage the risk.

d.      Monitoring and reviewing the risk: Observing the effects of treatment.

2.       Deliberate: Implementing operational risk management deliberately as a routine best practice is an ideal best practice. For example ensuring quality assurance and performance reviews. This involves five steps:

a.       Identifying the hazards

b.      Assessing the hazards

c.       Taking decisions to manage the hazards

d.      Implementing measures to control hazards

e.      Observing changes after taking measures

3.       Time Critical: This form of operational risk management is implemented for effective use of resources available with regards to time management by the employees of an organization. For example during a change of personnel on duty, the transfer of duties must be swift and within a short time. There are four steps involved in this form of ORM best practice.

a.       Evaluate the state of affairs: Considering task loading, human factors and additive factors.

b.      Evaluate your resources: This involves evaluation and leverage of resources for labor, material, equipment and information related to the hazard.

c.       Proper communicate about the risks: There is the need for proper communication with people related to and affected by the hazard.

d.      Executing measures and observing: Taking action and then monitoring the change for positive results.

Importance of Operational Risk Management

The importance of OR management is that it helps in identifying the control weakness of an organization. This is crucial for minimizing risk of high profile losses that organizations may face. Furthermore, there has been an increase in focus on ensuring implantation of regulations to ensure best practices in businesses. Operational risk management ensures implementation of rules and regulations in any organization enforcing compliance. Additionally, implementation of operational risk management ensures cooperative governance and transparency which is an important best practice.

Therefore, there is need for organizations to implement operational risk management guidelines to ensure effective best practice.

There are many risk management techniques and they vary according to the type of business. Nonetheless there are five basic risk management techniques recommended and generally applicable to all types of businesses. These include:

Analyzing Features of Effective Management:

This involves identifying the tangible and intangible assets. The tangible assets, such as capital can be at risk, while intangible assets such as recognition and name of the company can be damaged. Once the risks have been identified, the extent of the damage can be assessed by determining the probability and then multiplying it with the cost of the event.

Considering Priority Risks:

Identifying and assessing the risks is not enough. Considering the priorities of these is crucial. To ensure effective risk management, there have to risk management plans to handle the risks based on the priorities of the business. The factors involved in the risks identified must be considered. Additionally, there is the need for accuracy of the assessments is very important.

Type of Business:

The type of business governs the type of risk management technique. There is a variety of types of business and there are as many risk management techniques. Whatever the type the business may be, there are four basic efforts required. These are:

• Avoidance: This requires one to stay away from implicative activities. However, this only minimized the risk, it does not eliminating it.
• Risk Reduction: The business owner must take measures to reduce the risks identified.
• Risk Transfer: When there are options with a third party such as in the case of purchasing insurance policies.
• Risk Retention: When the probability of risks occurring is very less, or the costs of mitigating the risk, this is the only way out. Additionally, in some businesses transferring the risk may be prohibitive, and the business has to consider risk retention.

Signification of the Capital:

Retaining the capital is more important than making profit all the time. That means if proper risk management is implemented as a best practice massive capital losses can be prevented. Therefore, the government is also persistently involved in risk management. As a result business agencies are dedicated to creating emergency plans.

Potential Threats:

As global financial and economic instability has increased in recent days, risk for most businesses has mounted. This has made government risk managers less risk tolerant and they choose to ensure total security by eliminating every likely risk. Therefore liberties become liabilities and if best practices are not implemented they can become threats. This leaves corporate risk managers with little choice and they have to ensure compliance.

“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.

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.

Here are some of the most common financial risks which a bank faces:

Paying Creditors:

Banks usually have a large network of clients. These clients deposit their money into the bank. The bank utilizes these funds to provide loans to other clients. The bank pays its clients a small percentage of the interest the bank itself is receiving from the borrower. The risk every bank faces here is of all of its clients withdrawing their money at the same time. If such a situation happens, the bank will not be in the position to accommodate the demands. Henceforth, the bank will become bankrupt. This is probably the biggest risk a bank faces while operating.

Recovery from Debtors:

Another risky situation for a bank is to recover the loan amount along with the interest from the debtors. If the bank does not do this, it won’t be able to pay the creditors. The major income for a bank is through the interest rates charged from the debtors. If the loan is not paid back by the debtors, the bank will bear losses. Therefore, this aspect is the second major risk factor for a bank to deal with.

Errors made by Machines and Humans:

The organizational structure of a bank is always dependant upon human and electronic resources. There are errors made by both resource types. However, it is the responsibility of the bank to make sure that these errors are minimal or they might affect the profit and loss ratios.