Significance of Risk Management for an Organization
Risk Management relates to the practices and framework for identification, measurement, management and reporting of risks related to the objectives of any organization.
Risk Management in an organization primarily involves 8 important aspects. These include determining the risk appetite of an organization, establishing the objectives which reflect the appetite of company, identification of internal and external potential risk events, assessment of associated risks, development and implementation of a proactive plan for addressing the potential risks, creation and implementation of control procedures and policies, collection of information and communicating the same to the workforce and regular monitoring of risk-control program and introducing changes whenever required for maintaining the relevance of the program.
Taking a broader perspective, business risk is related to the situation wherein a business is subjected to particular events which are likely to have a negative impact over the objectives and strategies of a company. Therefore, a business risk comprises of two factors the possibility of occurrence of an event and the significance of associated outcomes.
However, specifically speaking a business may be exposed to many types of risks such as operational risk, financial risk and strategic risk etc. While strategic risk may involve taking wrong business decisions such as poor accounting strategy and poor marketing strategy; financial risk may arise due to decreased financial control. This leads to poor inventory management and receivables. Moreover, operational risk might also be posed to a company due to human activities such as daily activities and poor practices.
The production as well as utilization of management accounts on a regular basis offers a tool for analyzing the progress of a business. Besides this, comparison of management accounts against the forecasts and budget is essential to know what differences could arise. This also enables us to concentrate on the areas that need improvement. Moreover, you must ensure the maximization of efficiency and minimization of costs for keeping a robust cash flow and mitigating risks. Additionally, you would intend to concentrate on the expenses and outgoings and try to make savings or reduce the costs. You may also consider the overhead expenses like utility bills, wages, rent, rates and the cost associated with production of revenue like transportation, packaging and material expenses.
While observing the costs if you decide that reductions are needed, you must ensure that the decisions are made on accurate basis and right areas of business. Making wrong decisions could be detrimental to the interest of the company; therefore you are required to ensure that you get most cost-effective and effective solutions.
Continuous evaluation and forward planning is the key to management of risks in business. This would not only enable a business to tide through difficult times but also facilitate stronger business growth.