What is risk management?
In every form of business activity, the possibilities of risks are common eventualities. Therefore, evaluating possible risks and finding way in which to avoid them or reduce their impact on the business is referred to as risk management. This involves a routine verification of the business’ operations to identify any risks before they even occur. A good risk management strategy can save a business from incurring bad losses by averting risky situations.
However, in many occasions total prevention of risks may not be possible. Risky situations that may affect the business are not easily predictable. Nonetheless, risk management strategies can help cushion the impact of these situations. Risk management strategies depend on the type of risk experienced or anticipated at that particular moment. Some risk management strategies involves the company accommodating the effects of the risk and processing financial plans to counter the impact (Risk).
Insurance is another way of managing risk by transferring an organization’s risks to the insurance company. In the event that a risk, as agreed through the insurance cover, occurs, the organization gets full compensation of the loss incurred as a result of the unprecedented eventuality. In addition to that, identifying the specific area that creates the highest chances for a risk to occur, the management can chose to close it down as a risk management procedure. Basically any action that can reduce a possible occurrence of a risk or risks is classified as a risk management strategy.
Importance of risk management
Every business’ main agenda is to make and maximize profits. Risks are events that compromise the ability of a business to capitulate profits. Risk management is meant to create the balance and help protect an organization from underperformance. Businesses and organizations are vulnerable to numerous risks and risk management procedures are meant to reduce an organization’s vulnerability. Financial risk management strategies are the systematic plans to protect an organization from experiencing financial loss.
Every organization must have financial risk management procedures to avoid financial misfortune. Nevertheless, financial risk is just one of the many risks an organization can face. Risk management is not only designed to protect financial risks but also to protect the workforce, customers and the surrounding community (Risk). Risks like a fire outbreak are not only hazardous to the organization but also put the surrounding community at risk as well.
Risk management also involves the preservation of an organization’s important documents and assets. Protection of classified data reduces the risk of a breach in an organization’s privacy which can affect the organization’s competitive capacity.
Forms of risks
Risks are classified into two categories were in the first category, the risks can be avoided while in the second category, the risks are inevitable and have to be accepted and planned for. Risks are also split into macro and micro risks depending on how they occur. Macro risks can either be systematic or unsystematic. The systematic macro risks are those that are unpredictable and can not be anticipated. These types of risks have only one way of managing their effects, planning and preparing for them. An example of such risks is a change in legislation.
Changes like central bank’s interest rates can not be anticipated but prepared for. Systematic macro risks are attached to specific resource and can be averted. Micro risks on the other hand are referred to as small scale risks and include events like business risks, liquidity risks, exchange rate risks, political risks and market risks (University of Surrey). These are risks that can be avoided at the event that they occur.
The impact of risk management in times of crisis
Economical crisis is an event that affects the business community adversely. During such times, risks management can be an effective reliever from the impacts of the crisis. Risk management helps an organization to protect its interests by preparing for the worst (Mishra). This maintains a smooth operation of the company which means that objectives can be achieved even in times of crisis. Risk management strategies are designed to avert and make sure that chances of damages and losses are reduced. With risk management policies in place, an organization’s strategic and business plans are more likely to be achieved.
Many benefits are accrued from risk management strategies the most important one being that of reassuring the organization’s stakeholders that the organization is well secured. To an organization, risk management reduces the chances for risky eventualities. It helps organizations to prepare for these unseen calamities and hence enhances a positive response to the problem. In human resource department, risk management protects the work force against suffering unprecedented risks derived from accident within the organization.
This ultimately reduces absence of the workforce which ensures continued operations even it times of crisis. An organization that is prone to dangers and accidents does no attract investors. The corporate world really gives detailed attention to risks involved before investing in an organization. Organizations with poor risk management strategies therefore are vulnerable to the effects of a crisis and no investor would want to put his or her investments in a venture that is at risk.
Ways banks can reduce risks
Banks and other financial foundations are very important institutions in any economy in the world. The banks control the money market and financial security is solely vested in them. Their safety is not only a concern of the banks management but also the whole business community. To reduce financial risks, a bank may consider imposing transaction tax to reduce precariousness in the banking industry as well as increase government margins in revenue collection (Crisanti). A detailed contract outlining the banks standard operating procedures can also be of importance and helpful in the event that a conflict arises.
Financial loss can be through expenditure on salaries, embezzlement and theft of funds. To reduce these possibilities banks need to consider employing and taking advantage of the current technological advancement. More soft wares that can perform more effectively than human resources can be beneficial to the banks. Installation of such soft wares can help avert and reduce the risk involved when finances are handled by the banks personnel. Data back up and confidentiality must be upheld if risk is to be managed.
Banks can reduce their risks if they constitute plans and strategies to deal with eventualities. Like for instance, government policies may adversely affect banks operations. Since such situation can not be avoided, it is in the banks best interest to plan and have a financial set out plans to control such circumstances if the impact of the risk is to be reduced (Mishra).
Risk. “The Importance of Risk Management to Business Success.” whatisriskmanagement.net, 2011. Web.
Crisanti, David. “The Best Way To Reduce Risk In The Banking System Is To Stop Rewarding It.” Business Insider, 2012. Web.
Mishra, Jaideep. “Risk management in banks: Simple steps for difficult situations.” Economictimes.com, 2011. Web.
University of Surrey. The Benefits of Risk Management. Potal.surrey, 2012. Web.