All you need to know

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All businesses are businesses where people collaborate, take risks, and profit when they overcome certain problems. As in science, correlation does not necessarily mean causation: just because you take a risk does not mean that you will automatically succeed.

Risk management is a very critical business management process where all of the monetary assets of a certain organization are identified, assessed and controlled. These assets include both the capital and the profits of the organization.

Here’s everything you need to know about enterprise risk management:

Why is business risk management important?

As a business, businesses must assess and experience a wide variety of risks. These risks include, but are not limited to, financial uncertainties, technology issues, strategic management issues, natural disasters and any accident, large or small.

About 20% of all businesses fail within the first two years of opening, and that number rises to 45% over the next three years, and then to 65% over the next five years (1).

Business risk management exists as a way to mitigate these risks to levels that the business can manage. While it is virtually impossible to completely eliminate all risks from a business venture, BRM allows us to combat and minimize those risks. The BRM also examines the relationship between risks and their impact on the objectives of a business or organization.

How does this risk management process work?

The business risk management process is complex, so it is usually divided into several separate processes. Here is a representation in 4 steps (2) of the whole process:

  • Identification of risks

    The first step in solving any problem is to understand all of the variables involved. As a business, you are instantly thrown into an ever-burning fiery pit, and you have to make sure you don’t burn. A good company constantly studies all risks: both internal and external.

    Type of risk Example
    Avoidable risk Professional liability
    Strategy risk Declining sales due to a change in trend
    The compliance risk Government introduces new laws
    Operational risk Production machine failure (s)
    
    

    A good strategy here is to classify each different risk into one of four types: avoidable risks, strategic risks, compliance risks, and operational risks.

  • Analyze the risks

    After determining what type of risk your business may experience across all the variables involved as well as the various factors, you will need to analyze and calibrate for each possible risk. In other words, you need to make a list of what could happen if you take a certain risk: the odds of such a thing happening and so on.

    A good way to analyze risk is to use a probability scale (3). For example:

    Risk that something happens Probability value
    Very little luck 1
    Small chance 2
    A little bit of luck 3
    A lot of chance 4
    Extremely likely to occur 5
    
    

    Here we can see that the higher the probability value, the more we see a risk becoming more likely to occur.

  • Face the risks

    It is the most vital step in the whole process. This process is where you will have to deal with any potential issues in your path. Businesses need to research and find the best tactics for each risk involved and deal with them quickly.

    With the way the business world is changing and how ruthless it is these days; businesses will find it more effective to use customized solutions rather than generic problem-solving techniques.

  • Risk & opportunity monitoring

    The stress of a business is not limited to risk mitigation, these risks and problems can arise again soon. BRM means that one must always remain vigilant so that the organization can deal effectively with such problems.

    A good tip to prevent such problems from happening again in the future is to take out insurance. There are insurance policies for all kinds of issues that may arise in your business. For example, natural disaster insurance covers natural disasters. Responsibility for employment practices (4) Insurance covers various legal issues that employers face due to issues with employees, such as lost wages, physical injuries, etc.

What are the disadvantages of using business risk management?

As with all things, BRM comes with its own set of problems. Not all businesses should implement a world-class business risk management system. Here are some of the risks involved:

  • Calculations

    BRMs involve very complex calculations that can take days or sometimes weeks to calculate by hand. It can take a lot of manpower from your business.

  • Ambiguity

    A business can only prepare for so many risks at a time. This ambiguity can induce a feeling of anxiety which can exhaust performance.

  • Implementation

    No BRM technique can be applied to all companies at the same time. Finding a good implementation or not and wasting time with a bad implementation can cost the business valuable time and resources.

  • Mitigation

    Sometimes when you try to alleviate a problem, the problem erupts and grows exponentially. In such cases, it would be more effective to cut the problem to its heart, even at the cost of a small loss. The average BRM does not bear any kind of loss.

What types of risks does the BRM manage?

There is no real limit to the type of risks the BRM faces. We’ve already covered a basic general idea of ​​the different types of ERM risks. Here are some examples of the risks BRM faces:

  • Risks of natural origin

    All risks of natural origin: earthquakes, fires, tornadoes, etc. are risks that a company must think about and have solutions in case they occur.

  • Financial risks

    Risks related to the company’s financial assets: bad investments in a certain company or bad relations with a distributor. These two problems, and more, could prove fatal and therefore should be mitigated with the help of various techniques. A good way is to insure.

  • Avoidable risks

    These are risks that can be avoided as a whole if certain measures are taken: departure of employees from the company at crucial times, problems in the workplace, etc.

  • Strategy risk

    These are risks of studying the trend and how the real world works. For example, if one sets up a business based on restless spinners, there will always be a risk that the trend of restless spinners will die out, killing demand.

  • Operational risk

    Operational risks relate to the risks associated with the operation of the entire company. For example, the risk when handling machines or even computer systems: a production machine that goes offline or a system that crashes are both operational risks. Bringing in a professional to permanently take care of these machines is the best way to mitigate such a risk.

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