7 Effective Risk Management Strategies in 2018

7 Effective Risk Management Strategies in 2018

Business risk comes in a variety of tangible and intangible forms over the course of the business life cycle. Some risks occur during the ordinary course of business operations, while others are due to extraordinary circumstances that are not easily identified. This is the reason why strict implementations of risk management strategies should take place.

Regardless of a company’s business model, industry or level of earnings, business risks must be identified as a strategic aspect of business planning. Once risks are identified, companies take the appropriate steps to manage them to protect their business assets.

Risk management is the identification, assessment, and prioritization of risks or uncertainties. Different risk management strategies take place by minimizing, monitoring and controlling the impact of risk realities. It also takes place by enhancing the opportunity potential by applying coordinated and economical resources.

Basically, risk management is essential in any business. It lays foresight for returns on investments and projects all potential backlashes a company could face by starting a new (or even routine) endeavor. This article will focus on what is risk, risk management and the best and effective risk management strategies.

What is a Risk?

Risk Management Strategies and Steps in Assessing

A risk refers to an event or circumstance that has a negative effect on your business. For example, the risk of having equipment or money stolen is the result of poor security procedures. Types of risk vary from business to business.

Thus, one must decide on how much risk he/she is willing to take in any kind of business. Some risks may be critical to your success. However, exposing your business to the wrong types of risk may be dangerous.

What is a Risk Management Strategy?

A risk management strategy provides a structured and coherent approach to identifying, assessing and managing risks. It builds in a process for regularly updating and reviewing the assessment based on new developments or actions taken.

The process of identifying and reviewing the risks that you face is known as risk assessment. By assessing risks, you can be actively aware of where uncertainty surrounding events or outcomes exists.

5 Steps to Assess Risks

Before determining the most effective risk management strategy for your situation, there are five steps to take in first assess the risk and best solution.

risk management strategies infographic

Identify the risk

Risks include any events that cause problems or benefits. Risk identification begins with the sources of internal problems and benefits or those of competitors.

Anticipating possible drawbacks of a business doesn’t have to feel like gloom and doom for you. Identifying risks can be not only a positive experience. Also, it can be an experience you can take part and learn from.

Risks can be internal or external. Thus, software can be used to identify the wide range of risk possibilities.

Analyze the risk

Once you have identified risks, you can thoroughly analyze the potential effects that each will have on consumer behavior, your company and other current endeavors.

During this step, you will estimate how likely the risk to occur. Also, you will estimate the fallout of each risk to decide where to focus first.

Evaluate the risk

Now you can assign a ranking quality to the likelihood of each risk’s outcomes. This will help paint a picture around how severely a risk threatens a project or new product.

You can also determine the magnitude that each risk potentially carries to destroy or support a new tactic. The magnitude is a combination of the risk likelihood and consequence.

Treat the risk

Since you have a grip on all possible risks and their severity, you can start treating the worst risks first. You’ll first want to look at the ways you can reduce the probability of a negative risk and then how to increase the probability of a positive opportunity.

At this stage of risk assessment, preventative and contingency should be prepared. This is to ensure there are no surprises as your move forward with action plans.

Prioritize the risk

Not all risks are created equally. You need to evaluate the risk to know what resources you’ll assemble towards resolving it when and if it occurs. Some risks are going to be acceptable. You would grind the business to a halt and possibly not even be able to finish it without first prioritizing the risks.

Having a large list of risks can be intimidating. But you can manage this by simply categorizing risks as high, medium or low. Now there’s a horizon line and you can see the risk in context. With this perspective, you can begin to plan for how and when you’ll address these risks.

Monitor the risk

You know your risks, their likelihood, what will happen if they occur and how to resolve any rising disaster. What next?

Monitor the risks by tracking involved variables and proposed possible threats to chain reactions. As your tracking system identifies changes, calmly treat the rising problem to avoid widespread ripple effects and the triggering of a big risk.

7 Effective Risk Management Strategies

After the steps, it will bring you to the next important wave of risk management: treating the risk.

Risk Management Strategies arrow

There are several ways to treat risk. They all depend on what type of risks is being treated and how serious those risk’s repercussions or opportunities are. Let’s take a look at 7 effective risk management strategies.

Avoidance

Avoidance eliminates the risk by eliminating the cause. It may lead to not doing the activity or doing the activity in different way.

The easiest way for a business to manage its risk is to avoid it altogether. Commonly, avoidance takes place when a business refuses to engage in activities that will carry risk of any kind.

The advantage of this strategy is that it’s the most effective way of dealing with a risk. By stopping the activity that’s causing the potential problems, you eliminate the chance of incurring losses. But the disadvantage is that you also lose out on any benefits too. Risky activities can be very profitable, or perhaps have other benefits for your company.

Thus, this strategy is best used as a last resort, when you’ve tried the other strategies and found that the risk level is still too high.

Mitigation

Mitigation reduces the probability of occurrence of a risk and the impact of the risk within acceptable limits. This strategy comes from the fundamental principle that earlier the action taken to reduce the probability or impact of a risk is more effective than doing fixes to repair the damages after the risk occurs.

For instance, software companies mitigate the risk of a new program not functioning correctly by releasing the product in stages. The risk of capital waste can be reduced through this type of strategy, but a degree of risk remains.

This is probably the most common strategy, and is appropriate for a wide range of different risks. It lets you continue with the activity. However, it also lets you continue with measures in place to make it less dangerous.

If done well, you have the best of both worlds. But the danger is that your controls are ineffective, and you end up still suffering the loss that you feared.

Transfer

Risk transfer turns to a third party. The third party, like insurance company or vendor, is paid to accept or handle the risk on your behalf. Thus, the ownership as well as impact of the risk will take care of the insurance company for you.

In some instances, businesses choose to transfer risk away from the organization. Risk transfer typically takes place by paying a premium to an insurance company for protection against substantial financial loss.

For instance, property insurance can be used to protect a company from the financial losses incurred. That includes when damage to a building or other facility takes place. Similarly, professionals in the financial services industry can purchase

errors and omissions insurance to protect them from lawsuits. These lawsuits brought by customers or clients sometimes claim they received poor or erroneous advice.

Acceptance

This strategy means accepting the risk, especially when no other suitable strategy is available to eliminate the risk. Acceptance can be passive acceptance or active acceptance.

Passive acceptance requires no other action except to document the risk as they occur. In an active acceptance approach, a contingency reserve comes to recover the losses of time, money or resources.

The advantage of accepting a risk is pretty clear. There’s no cost, and it frees up resources to focus on more serious risks. The downside is also pretty clear. You have no controls in place. If the impact and likelihood are minor, that may be fine. But make sure you’ve assessed those things correctly, so that you don’t get a nasty surprise.

Exploitation

Exploitation increases the chances of making a positive risk happen, leading to an opportunity. This strategy reduces the uncertainty associated with a positive risk by ensuring that it definitely happens.

Control

This is the process of actually managing the risk. This includes taking proactive steps to reduce the identified risks where possible and putting steps, rules or procedures in place. This is to minimize the residual risk, reducing the chance of a loss or the severity of such a loss.

Retention

Risk retention involves assuming the loss or gain, entirely. This option is best for small risks where the losses can be easily absorbed and made up.

See Also: Breaking Down Risk Management

 

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