Risk management is the process of pinpointing possible risks, evaluating them, and highlighting them. It also involves laying down extenuation measures to minimize or even reduce the possibility of occurrence of such risks to zero. Such risks include potential financial crises, project investment failure, credit risks, natural disasters, accidents and deliberate external attacks.
It is essential for every person, business entity, or organization to have an effective risk management plan. Below are strategies for effective risk management.
- Identify and evaluate the risks. Being acquainted with the kind of risk(s) involved in any situation is a vital fundamental step in dealing with the risk. It involves evaluating the magnitude and potential effect of the risk. It is prudent to employ professional risk assessment techniques in the evaluation, to eliminate all potential errors. Accuracy in assessment gives more confidence in the action taken subsequently. You should not undertake assessment on a one-time basis. In the dynamic world we are in, everything changes, including risks.
- Prioritize. Knowing the risks involved in your organization is a prerequisite of decision-making. Before making any deliberations, it is paramount to prioritize the risks. It will help you to know which ones require more expertise in approach and those that require less attention. It will enable you to know which ones are worth time and effort and those that are not worth venturing in. With this information, you can easily make worthwhile decisions.
- Consider their relevance to your organization and its objectives. Before investing time, effort and precious resources in any risk, evaluate its significance to your organization. This applies especially in case of involving third parties such as insurance agencies in your management plan. You might just look back one day and realize you have been paying hefty regular premiums to mitigate a risk whose occurrence would only cause miscellaneous effect to your organization’s operations or objectives, or one that was unavoidable anyway. Observing normal hazards can reduce occurrence of some risks.
- Commit adequate resources in the management. Risk mitigation does not intend to save you from absolute losses. It aims at strategic spending to produce a checked expenditure. To manage a potential extensively destructive situation, you should be willing to spend a significant portion of resources towards its dwindling. The more you are willing to employ, the more shielded you get from the effect of occurrence of the risk. This entails investment in expert services as well as availing requisite resources to the professionals for operative performance. Although it is quite expensive, it is far easier to spend on managing a risk than to deal with the aftermath of their occurrence.
- Keep records of risk trends. Any risk you get involved with should have a recorded track of progress from the beginning of its existence to its outcome. The ones that you dealt with successfully or nearly missed their occurrence are a guiding path to follow and those that got out of hand or were unforeseen and eventually occurred are a lesson to refer back to. Constant reference to them will enable you to avoid repetition of a past experience.
- Avoid disclosure. As one of the definitions states, ‘risk is exposure to uncertainty’. If you are afraid of the dark, you cannot voluntarily take a walk at night. As an organization, the best way to avoid an encounter with a risk is avoiding situations that offer you potential gain and potential loss on the same plate. It is the easiest and most effective way to avoid encounters with risks. It is not the best way for an organization to go (success-oriented organizations constantly take risks), but you can consider it especially with risks carrying a huge magnitude of potential loss.
Risks are part of any business or organization with goals to achieve. They are unstable ladders, though; they can take you to the cream of your niche or potentially reduce you to a beginner’s level. It is advisable to involve risk-management techniques to approach risks, especially those that are voluntary. It enables you to bend the risk and incline it to your favor. If you are ready to take your risk assessment and management strategy to the next level, contact the Chandler & Knowles CPAs team today.