Handling and managing risks is called risk management. It is a complex process that involves identifying risks and finding ways to minimize the dangers associated with them.

In an ideal situation, a prioritization method is followed where the most obvious and dangerous risks are handled first. Since risks are a future occurrence, one is not sure of them happening or not happening, which is why there is a probability associated with every kind of risk.

The ones that have higher chances of occurring are taken care of first before moving to the less dangerous risks. The process of doing so can be difficult because it is not always easy to properly identify and assess risks.

Understandably, risk is something that is always associated with business. The form and type of risk might change with changing times and situations; however, there is always some kind of a danger hovering over any kind of a business.

If small businesses face risk of being overtaken by big corporations, big businesses have the fear of running into financial or legal trouble. This is why every business has to take steps and manage the risk factor so that the dangers can be reduced.

However, as mentioned above, risk management is not very easy. The first step is to identify risks, which becomes difficult as risks differ from business to business. Nevertheless, some risks might be the same to all the businesses or industries.

Experts are researching on risks and risks management so that the whole system can be improved. Now, there is a new type of risk called ‘intangible risk’ that is mostly ignored by organizations mainly due to poor identification. Intangible risks are very dangerous because they have a hundred percent probability of occurrence.

It is very important to take necessary measures to reduce these risks. They are directly associated with reduced productivity, falling cost effectiveness, substandard quality, lessening brand value, worsening service, declining earnings quality, and above all profitability, which is associated with all the above mentioned factors.

This is why it is important to concentrate on intangible risk management. It allows risk management to create instant solution to the risks that put the business in danger.

Risk Management – The Method

The method of risk management is simple. Firstly, risks are identified by doing research. Once identified, they are assessed to know their probabilities and the kind of damage they can cause. In the next step a strategy is planned to reduce the risks after prioritizing them properly so that the risks that possess the most danger and have the highest chances of occurring are taken care of first.

Every business must take major steps to reduce risks. It is important that help from professionals is taken or risk management software are used as a solution. If risks are not properly accounted for, a business would find it difficult to thrive and grow.

In order to alleviate such risks from your business, you need to understand them completely. By doing this, you will be able to draft appropriate risk management strategies using best practices for inventory control. A few key inventory risk types are mentioned below.

Theft

Theft is one of the biggest risks with regard to inventory control, specifically when the inventory is higher in value. If internal employees are involved in the theft, it is much more difficult to identify as they know the entire system and would probably be wise enough to erase all their tracks after the theft.

Every year, firms spend millions of dollars to prevent theft risk. They invest money in security measures like cameras or by hiring watch guards to prevent any incidents of inventory theft.

Inventory Waste & Damage

Inventory usually tends to get damaged while being used in the normal business processes. Damaged inventory cannot be used and goes to waste, increasing the costs of the business. To avoid inventory from being damaged and to reduce waste costs, companies create inventory control policies to minimize the damage as much as possible as well as issue rules and regulations regarding the effective use of inventory to prevent waste.

Inventory Loss

Inventory is a current asset to a firm. A loss of inventory means a reduction in the company equity. Goods in the inventory can get lost if the inventory is not managed properly or if the employees are not careful in handling inventory.

Firms have now created an inventory control system to identify the exact amount of inventory loss as well as the cause of the loss. This enables them to reduce company expense and prevent such inventory losses.

Shelf Life

Many products have a certain amount of shelf life. This poses an inventory risk for the company. Perishable items like milk and eggs have a smaller shelf life than other products and companies producing such goods may be at a higher inventory risk. This requires manufacturers to have a tight control over their manufacturing and inventory control policies. In such cases, firms produce only as much as the demand requires. Producing less than required will prevent the company from meeting the demand while producing a surplus may increase waste costs.

Lifecycle

All products go through the product life cycle. Those products that are in the decline stage are at a higher inventory risk. Firms of such products tend to tighten their inventory control and manufacturing policies and only produce enough to sufficiently meet their current demand. A surplus production of goods that is not sold in the market will become obsolete and will be a heavy burden on the firm.

As the business world tends to evolve at a quick and nonstop pace, these risk factors are being included in standards designed for effective risk management.

Following are a few things that you need to understand about risk that will keep your business out of harm’s way.

An Organization is Flooded by Risks

Nowadays, an organization isn’t just liable to risks associated with losses. Companies have to worry about something more. Many businesses are increasingly focused on enhancing their reputation in the business world along with the task of yielding maximum advantage from its workers.

Risks are No Longer Traditional

Traditional risk factors associated with marketing, credit rating, and marketing are being treated well along with the issue of protecting the reputation. Companies handling these risks are quite confident about their performances but when it comes to non-traditional risks; their confidence seems to get weaker by the day.

Risks associated with regulations, climate change, human capital, information technology, and terrorism are categorized as non-traditional risks. And these seem to be taking on too many businesses that aren’t protected.

The Key Lies in Awareness

Coping with standards that are associated with risk management can lead to a better risk-free environment in any given organization. Setting an understandable risk inclination and establishing clear systems and procedures to scrutinize ongoing risks are also essential.

Chief Risk Officer

Businesses have to appoint a figurehead who’s responsible for developing and executing the risk management outline before the risk itself reaches maturity, majority of those companies that approve the concept have already adopted this concept. This person is referred to as the Chief Risk Officer or CRO. The concept is most accepted in the economic sector, where supermajorities of companies have selected, or have an arrangement to hire a CRO.

Investment Profits are Predicted

Organizations everywhere, no matter big or small, are planning to boost speculations. Hazard management is becoming more of a norm and within the years to come, the discipline of risk management will become more and more prominent in the field of business studies.

Over the years, internationally recognized standards have issued an established use of diction. This means that legal documentation or office manuals should be typed or written in a language that is understandable by all. A language that is too technical to understand will make compliance among organizations, a difficult task.

This standard is also applicable to the verbal jargon used in office spaces. Sometimes non-compliance can result from miscommunication leading to unwanted situations. People working in the organization, be it a laborer or the chief executive officer, should be able to communicate with others without any inconvenience.

The framework of an organization should be constructed in lieu of the framework guidelines provided by the authoritative bodies. This requires all organizations to have the same framework so that they can be judged on an equal level.

Criterion for dealing with hazard management issues has also been clearly defined. There is a standard procedure that needs to be followed whilst dealing with a crisis. This is applicable to all registered organizations and is to be included in their official manual for risk management standards.

Organizations like the ISO and COSO (Community of Sponsoring Organizations) ensure the prosperity of a company or business adhering to best practices. This includes the achievement of goals swiftly and effectively along with the implementation of dedicated management. It also includes the productive use of resources and extended control over business events.

The standards set by these organizations are aimed at ensuring best practices in:

Standard for Terminology: The choice of words used in organizations involved in risk management must be ideal. The language used in documentation and business procedures must be clear and transparent. Professional and financial terminology must be used in the right manner.

Structure of the Organization: Risk management standards establish a standard structure for organizations with risk management as a best practice.

Standards for Risk Management Process: Organizations with risk management must follow standard procedures set by these organizations. This is meant to make the whole process efficient and productive at every department and level.

Defining Objectives: These standards have defined the objective for risk management to enable organizations to fix a target.

Therefore, by implementing the standards established, organizations will succeed in ensuring compliance. These risk management standards are in accordance with the requirements stipulated by the International Organization for Standardization (ISO). In its recent document the ISO/IEC Guide 73 Risk Management, there are best practices which have been fixed as standards.

According to the requirements of the ISO, risk management standards must ensure compliance with a standard framework. This standard framework comprises of the following processes:

1. Establish a Context: There is need to define the objectives of the organization and purpose of best practices. Knowing the interests of the stakeholders and their importance to the organization is an important best practice as well. Therefore, there is need to define the key elements of the risk management process.
2. Identify the Risk: Considering what can go wrong and how it can go wrong is an essential best practice. This helps in identifying the key factors which increase the risks in any organization. This helps in risk management.
3. Analyze the Risk: There is the need for best practices which includes reviewing the controls which have been set. Analyzing the consequences of the risk and the level of impact it will have is also important.
4. Evaluate the Risk: Determining the magnitude of the risk is another recommended best practice. This is because ranking the risks helps in ensuring compliance at every step. Those ranking as high risks must be treated as a priority.
5. Treat the Risk: Identifying the options, selecting the best responses, developing risk treatment plans and implementing them are best practices to be followed.
6. Monitor and Review the Standards: The standards for risk management need to be reviewed, because improvements will be required.

The standards for risk management have been established to be concise and effective in any financial setup. However, risk management standards vary in different organizations. Therefore, they will be needed to make necessary adjustments.

There are two main categories of RM standards. These are international RM standards and standards set by the management of the company. Standards are set based on compliance with laws and regulations of the country or state. Moreover, there are RM standards governing every profession that exists today. The International Organization for Standards has issued more than 19, 000 standards for risk management. These are implemented as best practices worldwide.

Importance of Risk Management Standards

Fixing standards for RM is very important because they compel businesses to provide the best quality. Compliance with RM standards protects the business from unforeseen losses. There are cases where failure to ensure compliance with RM has led to legal action. To prevent this from happening, business owners set their own standards. Other business owners implement standards established by the government.

No matter what profession or form of business it is, there are quality and service expectations that must be fulfilled. For instance, in banks there are specific business protocols that have to be met. These protocols or best practices are synchronized with those of other banks worldwide. As a result of this international banking has become feasible and convenient. When standards are not fulfilled, banks fail to satisfy the financial needs of their customers.

Similarly, in healthcare intuitions, there are healthcare standards that must be met. For example, if health care insurance is involved there are requirements (best practices) that must be fulfilled. These protect both the patient and the healthcare practitioners. If a patient is wrongly treated, it proves failure of compliance with RMS. The consequence is that health care facilities get sued and shut down.

Advantage of Risk Management Standards

The main advantage of developing or implementing RM Standards is that, managers and CEOs can plan their business strategies. These standards provide the option to limit the extent of risk to be taken in the first place.

There are risks attached with every form of business and investment. RM Standards help by avoiding occurrence of circumstances that can lead to unforeseen losses. They also outline the approach business owners have to take to mitigate the risk. This is why compliance is the basic tool required for the success of every business.

What is the ISO 31000?

The ISO 31000 is an international standard which was developed to help every type of organization with risk management. It provided principles, frameworks and processes to help in risk management in a systematic and transparent manner.  It is applicable to all public, private or community enterprises, groups, individuals or associations.

Risk Management with ISO 31000

According to the ISO 31000 compliance with it ensures the following best practices to ensure risk management:

• It creates and protects value for goods and services
• It is an important part of best practice in all organizational processes
• It helps in decision making
• ISO 31000 addresses uncertainty as an integral aspect risk management
• It emphasizes a systematic, planned and timely approach to issues in any organization
• It requires the best quality of information
• Cultural and human factors are also taken into account
• ISO 31000 requires transparency as an essential best practice.
• Being dynamic it is flexible to changes
• It ensures constant improvements in the organization

Risk Management Framework with ISO 31000

The framework in compliance with the ISO 31000 ensures simplified risk management processes. It creates the ideal environment which facilitates best practices in development and implementation of risk management processes. The elements of risk management framework comprise of:

• Directives and Commitment: The success of any risk management effort requires the consent and support of the senior management and funding. Therefore proposals for how to identify, eliminate risks must be presented to the senior management before implementation.
• Design the framework: This required proper knowledge about how the organization works, internal and external risks, vulnerabilities and critical activities.

Processes in Risk Management with ISO 31000

Once there is compliance with ISO 31000 organizations can implement risk management programs and upgrade them according to standards. In new risk management programs ISO 31000 is an essential integrated best practice tool. This facilitates constant monitoring and reviewing of the framework to ensure risk management.

Organizations implementing the ISO 31000, experience continual improvement while risk management is successful.

To achieve their primary objective the OSHA conducts inspections and has the authority to audit the compliance of health and safety standards of any business organization in the Unites States. The OSHA sends its inspectors who carry out the inspection when they receive complaints, or hear about fatalities, accidents, or dangers. Alternatively, they may visit as a follow-up on an investigation to ensure implementation of best practices.

If the OSHA confirms violations of standards or non compliance with best practices it can impose penalties. This is often observed with small businesses because they may not have the resources to ensure compliance with best practices. Therefore it is important for business people to make sure that they have a sound understanding of the risks associated with the occupations the business. This helps to ensure that their workers are safe from hazards and taking protective measures.

The OSHA inspectors always research the history of the business and the owners before visiting the site. If there have been previous cases of poor risk management, the OSHA will take particular interest, and intensify the audit. Failure to comply with risk management, after being warned by the OSHA will only give them reason to take serious actions against the business owners or managers. They can also force businesses to get closed. If there have been accidents in the past, the cause must therefore be eliminated and measures need to be taken to prevent recurrences.

Hence, there should be compliance with policies, procedures, practices and protection against occupational hazards to ensure best practice. Additionally, it is a best practice to educate employees about health and safety measures to be taken at work. There should be proper training of the employees as a requirement for risk management. In order to ensure that these health and safety measures are practiced adequately, employers should encourage their workers to participate in compliance with the OSHA standards. These standards vary with businesses.

Looking out for the hazards is a best practice which every business organization should ensure. To ensure proper risk management procedures, there should be proper hazard communication programs installed in the work place. This will ensure immediate and accurate handling of hazards to protect the employees as well as the owners.

• Aligning Risk Appetite and Strategy – The framework takes into consideration the entity’s risk appetite during the evaluation of strategic alternatives, the establishment of related aims, and the development of mechanisms to manage risks.
• Improving Risk Response Decisions – ERM allows companies to define and choosing from different alternative risk responses, including risk reduction and risk sharing.
• Decreasing Operational Hindrances and Losses – By ensuring the implementation of ERM, companies will be able to identify potential risks before they occur and establish responses. Therefore, there will be no surprises, costs or losses.
• Discovering and Managing Numerous and Cross-Enterprise Risks – Because some risks may occur at the same time and at different parts of the organization, ERM is designed to provide effective response to the interrelated impacts and multiple risks.
• Grabbing Opportunities – ERM allows companies to manage numerous events, therefore allowing them to proactively discover opportunities.
• Enhancing the Use of Capital – By implementing ERM’s framework, companies will have more risk information than from any other best practice standard. Therefore, they will be able to determine how much capital they will require as well as be able to allocate capital efficiently.

Components of ERM To achieve the aforementioned goals, ERM was designed to consist of eight components.

1. Internal Environment – This component explains the tone of an organization and determines how a risk will be viewed and addressed.
2. Objective Setting – With this component, companies will develop a process to set objectives. Objectives are usually important for companies to identify potential events which can hinder their success.
3. Event Identification – Internal and external events which affect the company’s objectives should be identified and differentiated from risks and opportunities.
4. Risk Assessment – Risks should be analyzed based on their probability and impact in order for the company to decide on how they should be managed.
5. Risk Response – Professionals in charge of managing risks should be able to select risk responses in order to decide the actions to be taken beforehand.
6. Control Activities – This module shines the limelight on the need for establishing and implementing policies and processes that carry out risk responses effectively.
7. Information and Communication – Information related to the risks are identified, capture and communicated in a specific format and timeframe so that professionals can carry out their responsibilities effectively.
8. Monitoring – All the components and objectives of ERM are monitored and modified when necessary.

Whereas many believed that the ISO/IEC 27000 is similar to the ISO 9000 series for quality assurance and the ISO 14000 series for environmental protection, the series aims at doing more than ensure the privacy and technical security of IT systems. The series of best practices encourages companies implementing it to:

• Assess IT security risks
• Implement the right IT security controls based on their needs
• Use the guidance and suggestions marked by the series when appropriate
• Incorporate feedback and improvement activities to tend to threats and vulnerabilities

Major Published Standards

The ISO/IEC 27000 series consists of 10 published standards –

1. ISO/IEC 27000 – This standard offers an overview on the standards and provides a list of the vocabulary used.
2. ISO/IEC 27001 – This standard goes over the requirements needed to ensure the security of IT systems.
3. ISO/IEC 27002 – This best practice offers a code of practice for IT security management.
4. ISO/IEC 27003 – The ISO/IEC 27003 provides guidance for implementing IT security management systems.
5. ISO/IEC 27004 – Since metrics are necessary in risk management, this standard offers assistance in the measurement of IT security management.
6. ISO/IEC 27005 – For a broader look at IT security risk management, this standard is ideal.
7. ISO/IEC 27006 – Individuals or companies which provide audit and certification of IT security management systems should be aware of the requirements mentioned in this standard.
8. ISO/IEC 27011 – Telecommunication organizations which implemented the ISO/IEC 27002 standard may consider adding the guidelines of this standard to their companies.
9. ISO/IEC 27033-1 – As the network is usually the source of many risks, this standard offers an overview of Network security and its concepts.
10. ISO 27799 – For organizations in the health field, especially those which use ISO/IEC 27002 should be acquainted with the IT security management information mentioned in this best practice.

Standards to be Published

To ensure that the best practices of ISO/IEC 27000 are up to date and able to accommodate today’s IT risks, more standards are under development. Some of those standards companies should expect are:

• ISO/IEC 27007 – This standard offers guidance for auditing IT security management systems.
• ISO/IEC 27008 – This standard provides auditors on ISMS controls with guidance.
• ISO/IEC 27013 – For companies which seek to implement ISO/IEC 2000-1 and ISO/IEC 27001, this standard offers a set of guidelines to be followed.
• ISO/IEC 27036 – This standard offers guidelines which help companies and individuals ensure the security of outsourcing.

There are similar standards across the world, for example the BS 7799, thus companies should consider which set of best practices they need to implement.