Risk management definition its examples Types and components

Risk management

The definition of risk management is a financial and practical process of economic value in a company through the use of various financial elements to manage exposure to potential risks, whether credit risk or market.

This type of financial management must take into account the internal and external factors that can cause possible threats. The internal factors originate from the commercial activity of the company, and the external factors are related to the economic, political and social conditions that can affect the good performance of the company.

Based on the results that are presented through the functions of the company, the risks that can be tolerated and those that are highly dangerous to the well-being of the company can be identified. To determine them, it is necessary to have knowledge of the following steps:

  • Identify key risks : Companies must highlight the risk factors they face and incorporate those that affect competitiveness, personnel changes, legal regulations, and technological changes.
  • Calculate the level of each risk : In order for resources and efforts to be appropriately allocated, it is necessary to prioritize risks in order to design a plan if a threat arises.
  • Design a contingency plan : It is important to investigate to know what the possible risks are and to design specific activities and thus reduce the impacts. Despite this, it should be taken into account that not all risks are possible to identify or control.
  • Assignment of responsibilities : It is necessary for a person to be aware of threats and their evolution, and should also try to avoid the concentration of responsibilities in a single person by assigning activities to all personnel as appropriate.
  • Create expiration dates : The application of plans cannot be carried out indefinitely, since the threats could multiply and affect the processes. Therefore, it is necessary to determine the actions that must be carried out in the time necessary to carry out the activity.

Types of risk

Risk is an effect of uncertainty , a deviation from the course and objectives expected by managers.

It can be an event, a circumstance or a future condition.

To better understand, see some examples:

  • Work accident
  • environmental accident
  • Financial fraud committed by a partner
  • Loss of key employee in the organization
  • Event that became news and caused the brand’s reputation to fall
  • Problem in distribution logistics
  • stock loss
  • Difficulty obtaining credit
  • lack of supplier
  • Increase in production costs
  • Court lawsuits.

These are just a few examples of risks that can harm a company.

The origin of the risk can be financial (external or internal), operational, related to human failures, managerial incompetence or pure bad luck.

Recognizing this origin is important, but the role of risk management is not to seek justification, but to act so that these risks do not become negative consequences for the organization.

If they have already been converted, work must be done to alleviate these consequences, manage the possible crisis and generate actions to prevent it from happening again in the future.

Risk components

A risk typically has three components: an event , a consequence and a cause .

See some examples we’ve prepared for you to understand better.

Example 1

Imagine that the roof of a factory warehouse has a problem and cannot prevent rainwater from entering, wetting the products.

  • Event : rain.
  • Consequence : loss of products from stock.
  • Cause : lack of roof maintenance.

Example 2

An employee in the communications department asked to leave the company and the digital marketing campaigns he planned stopped being executed because nobody knew how to do it.

  • Event : termination of an employee.
  • Consequence : interruption in the company’s online communication planning.
  • Cause : lack of documentation regarding the process of creating digital marketing campaigns.

Example 3

With the rise of the dollar, production costs increase, and it is necessary to pass this on to the consumer, charging more for the products.

  • Event : increase in production costs.
  • Consequence : increase in sales price.
  • Cause : Dollar rise.

Note that the source of risk can vary.

In examples 1 and 2, it exists due to negligence by the managers, who did not maintain the warehouse and did not bother to establish a documentation process for the activities carried out in the company.

In the third example, it is assumed that the price of the inputs purchased for the company’s production vary according to the exchange rate, a volatility that cannot be prevented.

This does not mean that actions cannot be planned to avoid the anticipated consequence .

How to look for alternative national inputs, whose price does not vary according to the dollar, for example.

The consequence, in fact, can be more than one, as one thing leads to another.

Still in example 3, the increase in price can result in a decrease in sales , among other possibilities.

Key steps for risk management

To establish an efficient risk management policy in your company, you need to be concerned with the following steps:

Environment organization

Define the employee or sector responsible for risk management, ensure their training in the area and define permanent processes.

Risk identification

The first step is, based on knowledge of the company’s objectives, knowing how to recognize the risks that must be considered and managed .

Risk measurement

Not all risks are of equal importance. At this stage, its probability and possible impact on the organization must be calculated , in qualitative and quantitative analyses.

Risk response

Define what actions should be taken to avoid, reduce or share risks. Or for them to become opportunities rather than threats.

Risk monitoring

Assess whether there were residual risks, new risks or whether the planned actions had the expected result to, if necessary, promote changes in the strategy.

Examples of risk management

  1. The risk management is an analysis and measurement of possible risks to which companies are adjusted according to the movements of the economic market.
  2. This risk management focuses on measuring the possible risks of any financial investment, as well as the establishment of contingency plans if risks arise.
  3. Risk management is a fundamental process for companies to prepare for constant market changes and thereby reduce the impacts of the financial system.

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