Question

In: Finance

Imagine that you are a risk manager in any company. Assume that you have 6 causes...

Imagine that you are a risk manager in any company.
Assume that you have 6 causes of loss, which need strategies for each cause.
Mention in details with examples the process of your managing those risks.

Solutions

Expert Solution

Businesses face many risks, therefore risk management should be a central part of any business' strategic management. Risk management helps you to identify and address the risks facing your business and in doing so increase the likelihood of successfully achieving your businesses objectives.

A risk management process involves:

  • methodically identifying the risks surrounding your business activities
  • assessing the likelihood of an event occurring
  • understanding how to respond to these events
  • putting systems in place to deal with the consequences
  • monitoring the effectiveness of your risk management approaches and controls

The main categories of risk to consider are:

  • strategic, for example a competitor coming on to the market
  • compliance, for example the introduction of new health and safety legislation
  • financial, for example non-payment by a customer or increased interest charges on a business loan
  • operational, for example the breakdown or theft of key equipment

These categories are not rigid and some parts of your business may fall into more than one category. The risks attached to data protection, for example, could be considered when reviewing your operations or your business' compliance.

Other risks include:

  • environmental risks, including natural disasters
  • employee risk management, such as maintaining sufficient staff numbers and cover, employee safety and up-to-date skills
  • political and economic instability in any foreign markets you export goods to
  • health and safety risks

There are four ways of dealing with, or managing, each risk that you have identified. You can:

  • accept it
  • transfer it
  • reduce it
  • eliminate it

For example, you may decide to accept a risk because the cost of eliminating it completely is too high. You might decide to transfer the risk, which is typically done with insurance. Or you may be able to reduce the risk by introducing new safety measures or eliminate it completely by changing the way you produce your product. When you have evaluated and agreed on the actions and procedures to reduce the risk, these measures need to be put in place.

Risk management is not a one-off exercise. Continuous monitoring and reviewing are crucial for the success of your risk management approach. Such monitoring ensures that risks have been correctly identified and assessed and appropriate controls put in place. It is also a way to learn from experience and make improvements to your risk management approach.

All of this can be formalised in a risk management policy, setting out your business' approach to and appetite for risk and its approach to risk management. Risk management will be even more effective if you clearly assign responsibility for it to chosen employees. It is also a good idea to get commitment to risk management at the board level.

Good risk management can improve the quality and returns of your business.


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