Risk Management Defined and Explained

What exactly is risk management you ask? The International Standards Organization (ISO) describes it as, “the identification, assessment, and prioritization of risks, followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events.” On the other hand, how it is defined can range among industries.

In the financial industry, it is focused on dealing with exposure to credit and market risk by identifying its origins, followed by contingency planning and hedging. From a global viewpoint, like climate change and economic stability of under developed countries for instance, unique principles may be needed. The underlying point I’m trying to get across is that risk management correlates with the context it’s being used in.

There are specific principles that pertain to more or less all industries. Such principles are considered the “foundation” of risk management. They encompass global view, communication, proactive approach, information, integration and continuous process.

Global view looks at viewing all risk holistically relative to the things taking place around the world. Communication represents communicating with all stakeholders to make certain a strong understanding is obtained on every aspect of the risk involved. This is really important since risks are generally perceived in a different way by each person. The proactive approach principle is very important on the grounds that risk management is designed to foresee and plan for risks before they come about.

The information principle refers to understanding pretty much everything there is to understand about a risk. This is imperative for knowing how to deal with it. Among the more challenging principles will be the integration principle. Risk management just isn’t something that should be managed separately; rather, it should be an important piece of the all around business. Strategies must be built into daily business operations to make certain risks are averted, mitigated and appropriately prepared for continually. The last principle is referred to as continuous process. This principle advises you don’t simply implement risk management processes and walk away. A risk manager should continually apply and evolve the strategic activities day-to-day.

Many people don’t realize that positive occurrences can in fact require risk mitigation just like negative events. A good example is if you are selling a product and demand suddenly jumps by one hundred percent. Do you have the total capacity, materials and labor required to satisfy the excess demand? When evaluating risk factors, it’s important to remember that they can be both negative and positive in nature.

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