What is Risk Management?

Every small business and large organization faces risk on a daily basis. In some cases risk can be completely avoided but in other cases risk is unavoidable to a certain degree. Risk management is the process, approach, strategy and tactics developed, employed and executed with a purpose of minimizing the risk as much as possible. When planning and managing risk, in risk management, it is important to note the trade off. Trade of is the balance you need to make between the cost of avoiding the risk and the benefits from the risk being completely avoided or minimized as much as possible.

In some cases, businesses deal with minimizing the risk to a certain acceptable level because it is not cost efficient and cost effective to totally avoid or minimize the business risk. The exception to the trade off rule is when we face situation related to safety, security and high environmental impact. In such a case we have to invest in minimizing the risk to zero when feasible.

Business decision makers make tough business decisions with a certain level of risk and they assess the risk involved, the potential impact and develop strategies and tactics to manage risk. Risk management requires from decision makers in business to make tough decisions and consider various potential alternatives and business outcomes in order to make the right business decision.

How do we plan, manage and control risk management? Is there a process or approach for risk management? To keep things simple and manageable here is a very simple yet effective way to manage risk and develop effective and efficient risk management system. First, we consider various business scenarios and identify the risk involved in those scenarios. Second, we try to assess and evaluate the risk and its probability, likelihood and of course the potential threat and impact on the business in case things go wrong. Once we evaluate the risk of different alternatives we need to perform a what if analysis where we try to find the right trade off between risk minimization and willingness to accept the risk as part of the business. At this point we have all the information necessary and required for us to make smart decision regarding what alternative we are going to pursue. Once we make the decision now it’s the time to create our risk management plan. The risk management plan will include all the reactive and proactive or preventive processes, procedures and system we need to include in our business in order to perform risk management. Tools, training, skills and the right people are required for any risk management system.

As a conclusion, risk management is a business process or business system organized around business strategies and tactics with a purpose of managing and controlling the business risk to a certain acceptable or defined risk level. Risk is involved in every business organization and every business function such as finance, production, quality control, sales, etc. While in many cases it is impossible to completely define the risk and quantify the risk as well as its potential impact we can certainly develop a risk assessment and risk management strategy and processes to handle the business risk to a certain acceptable degree.

Learn more about risk assessment, risk management, risk management plan and risk management processes and tools: Risk Management

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