Many risks come with running a business. They can have a positive or negative effect on a business, or both. These potential hazards can cause damage to a business that could be costly and difficult to repair. You may also be exposed to other risks.
Although companies spend time and money on business risk management, many treat it as a compliance issue and have rules for employees to follow. This approach is limited. Rules-based business risk management cannot reduce the chance or impact of a catastrophe and can also limit your ability to seize business opportunities that could involve some risk.
What is business risks management? And why is it so important for businesses?
Business risk management is a subset in risk management that evaluates and prioritizes the risks associated with any changes to your business operations. It is a guide to decision-making in emergencies and planning for future opportunities.
A business risk management strategy allows you to respond to multiple risks enables informed and risk-based decision-making.
What risk are you most likely to take?
The following are examples that should be included in your assessment of business risk management:
Hazard risk: anything that can cause injury to persons at work, and which is not within the control of the business. This includes dangerous materials and fallout from machinery.
Risks to the environment and physical health: fires/explosions; any type of damage that could cause damage to your property. This includes natural disasters like floods, tornadoes, or hurricanes. These may be climate-related.
Human risk: problems that may affect your company’s operation such as alcohol or drug abuse, embezzlement, and business fraud.
Technology risks and operational risks: any event that may compromise your company’s operations such as a power cut, cyber fraud, or system failures.
Strategic risk: Inability to adapt to changes in a business environment. This can often be the result of poor business plans or losing a competitive edge in your industry
Financial risk: Risks associated with financial assets. This includes pricing, currency exchange, and liquidation. Customers and partners can present financial risks to a business. Your company’s ability to manage financial risks can be determined by business risk management. This includes the risk that your company will default on payments.
Enterprise risk management is a way to ensure that your company has a strong business risk management program.
What is enterprise-level risk management?
Enterprise risk management (ERM), which is the systematic and methodical process of identifying, analyzing, and responding to possible events that may pose risks to your company’s strategic goals or offer opportunities to increase competitive advantage, is called enterprise risk management. It’s your company’s expression of risk culture, your tolerance for risk, and your willingness to take on risk.
These are key elements that can be used to establish a sound governance framework for risk. It may also require outside professional assistance such as skilled risk analysts, to identify risks and respond to them.
Advantages and drawbacks of enterprise risk management
Structured well, acceptance of strategy risk can result in highly profitable operations. You will also be more compliant with regulatory, reporting, and legal requirements.
Enterprise risk management can have many advantages and disadvantages. This is because you are more aware of the risks that your organization faces and your ability to respond to them. This should help you and your staff increases operational efficiency and effectiveness as well as your confidence in the company’s ability and capability to achieve its strategic objectives.
There are inherent risks to enterprise risk management. Many factors can influence human judgment in enterprise risk management, such as experience, false assumptions, and gut feeling. This can lead to simple mistakes or more serious mistakes.
Uncertainty about what enterprise risk management means could cause you to overlook the economic climate and business environment in your sector. This can lead to either too inconsistent data or an overly cautious approach to risk…and missed opportunities. Enterprise risk management should be able to assess risks associated with specific business objectives. This must be anchored by key value drivers.
Companies’ strategic goals are responsible for determining whether any financial risks may be associated with their strategy. Financial institutions like banks and credit unions can take on risks by lending to consumers. However, pharmaceutical companies can be exposed to strategy risks for new products.
Companies with high financial risks can minimize the risk by creating and maintaining infrastructures such as trade credit insurance.
