9 principles of business risk management
Posted on 27 Aug 2019
Ever since the financial crisis, the boards of directors of companies, especially major ones, have been paying more of their attention the potential business risk management as well as its benefits, and financial directors of
Ever since the financial crisis, the boards of directors of companies, especially major ones, have been paying more of their attention the potential business risk management as well as its benefits, and financial directors of companies have also taken not only the financial situation but also the potential business risks into consideration when making policy. As business risk management can be considered an ever-changing art that should be applied by every businessman, here are some principles on how CEOs can manage risks in the most fluent and flexible way.
Author: Le Ratings, based on different sources.
1. Always think of risk management first
When making a new business plan, decision makers tend to not think of business risk management. According to a poll conducted by Harvard Business Review in 2011, around 42% of companies with 10,000 employees have Chief Risk Officers. They are the people responsible for using risk management tools in accordance to the risk analysis consisting of the risk lists and established by the Boards of Directors to determine the risks, directly managing the companies’ activities to ensure that the risk management process is carried out smoothly in every situation. Moreover, they are also in charge of proposing forecasts and plans the managing procedure of the possible upcoming business risks.
2. Project risk management is all about practicality
Instead of being just written theory, the risk management process must be more than that in order to serve the purposes of not only risk identification but also of risk control. If they are not being handled carefully, all the theories on project risk management may turn impractical concepts, which may mislead them from the actual potential business risks facing them.
As risk identification must be based on the practical current situation of the company, it is vital to integrate risk control into the operation of the company, since this grants the leaders a clear vision of the risks that the company is facing by detecting the main risks and evaluating their possibilities. If everything is done correctly, the leaders will be able to come up with a risk management plan that may help them counter or even take advantage of the risks.
3. Complexity is not the answer
Since the risk management systems are not operational ones, the dependence on analyzed statistics is not too necessary. Instead of being the desired goals of the business, risk identification should only be in form of assumptions. A simple yet comprehensive risk management system is what necessary to risk control.
4. Risk management strategies
When talking about “risks”, most people immediately think mainly of the “implicit financial risks”, and despite it being an important dimension, it is still not really sufficing to describe the hidden risks in business operation. In fact, it is actually more crucial to build a practical future potential risk management strategies and to think of them as a vital part of the business strategies, with all risk dimensions being considered carefully to make the operation work.
5. Risk identification for the whole system
Instead of only the directors having access to the risk management database, it should be disclosed to other factions within the company so each individual can understand and see the potential risks hidden within the company’s as well as within their faction’s activities. The financial directors should provide the heads of departments with the constantly-updated information, as well as note down practical cases informed about by the employees.
6. Risk management is not a report
The basis of risk management is uncertain future assumptions. It is to see how undesired external effects have influence over the business growth, thus making preparations to receive the lowest levels of losses or turning risks into opportunities.
7. There is no precise answer to risks
Risks are ever-changing based on external factors or impacts come from the general situation of the financial market, thus making risk assumptions ever-changing as well, leaving us with no certain answer to them. Therefore, it is important to constantly keep track of as well as update the database on the risk possibilities that may happen in the future to be well-prepared.
8. Expect the unexpected
The possibility of unprecedented and unforecastable events, such as natural disasters, national events, etc., happening is not rare in both the financial and the economic markets, and in order to develop the business and to avoid the possible damages that they may cause, it is also important to take these matters into account when constructing a risk management plan. Reality has shown that companies with better adaptation to surprising mishaps are more likely to succeed than those without it.
9. Finding successes in risks
Instead of trying to avoid of being afraid of the risks due to the fear of losses of profits and benefits, if they are good at risk control, they may be able to turn those risks into successes since they have forecasted it and seen all of its dimensions, granting them a more thorough look at the situation.
Author: Le Ratings, based on different sources.