For organizations, risk management is not about being ‘risk averse’. Risk management majorly is not aimed at avoiding risks. Risk management focuses on identifying, evaluating, controlling and “mastering” risks. Risk management can also mean taking advantage of opportunities and taking risks based on an informed decision and analysis of the outcomes. Business Training in Kenya has more information.
Risk management can be defined as the identification, measurement, analysis and control of those risks that can cause losses to an enterprise. In the ideal situation, risk management involves a prioritization process whereby risks are handled in a descending order, beginning with those risks which could cause the biggest loss and has the highest chance of occurrence being handled first, and those with least loss and the lowest chance of occurrence handled last.
The purpose of risk management is to eliminate or reduce as much as possible, the losses resulting from a particular risk. The strategies used includes transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk.
Risk management is broader than insurance in that it deals with both insurable and uninsurable risks as well as other appropriate non- insurance techniques of dealing with both types of risk. Risk management therefore also involves techniques other than insurance.
Benefits of Risk Management
Achievement of organizational objectives: With a risk management policy in the organization the organization is better able to focus on business priorities. It also enables managers to focus their resources on the primary objectives. Resources are not re-directed to deal with problems. Taking action to prevent and reduce losses, rather than cleaning up after the losses have occurred is in fact an effective risk strategy that results in increased confidence of shareholders and managers.
Risk management leads to a cultural change that supports open discussion about risks and potentially damaging information. The new culture of risk management tolerates mistakes but does not tolerate hiding errors. Also, the culture emphasizes learning from the mistakes which leads to improved financial and operational management by ensuring that risks are adequately considered in the decision-making process.
It also helps to achieve improved operational management will result in more effective and efficient service delivery. By anticipating problems in the various departments, managers may have more opportunity to react and take action. The organization will be able to deliver on its service promise by strengthening its planning process and helping management identify opportunities.
Proper risk management enables a business to handle better its exposures to accidental losses in the most economical and effective way.
It also enables a business to handle better its ordinary business risks. Freed from concern about the accidental losses, a business can pursue more aggressively and effectively its regular activities.
If a business has successfully managed its pure risks, the peace of mind this brings about allows the managers to undertake new attractive speculative risks that they would otherwise seek to avoid. This peace of mind is made possible by sound management of pure risks may by itself be a valuable non economic asset because it improves the physical and mental health of the owners, managers and the employees who would be affected by losses to the firm.
The quality of its decisions is improved by considering how these decisions would affect the firm’s exposure to accidental losses. By alerting the managers to the risk aspects of ventures, risk management improves the quality of the decisions regarding such ventures.
Proper risk management may make the difference between survival and failure. Some losses such as the destruction of a company’s premises may so cripple the company that without proper advance preparation for such an event, the firm may be forced to close down.
Proper risk management can contribute directly to business profits through preventing or reducing accidental losses as a result of taking certain low cost measures to handle minor losses, through transferring potentially serious losses to others at the lowest possible fee, through electing to take a chance on small losses unless the transfer fee is a bargain, and through preparing the firm to meet most economically those losses that it has decided to retain.
Proper risk management can reduce the fluctuation in profits and cash flows. Wild fluctuations in cash flows can cause a big challenge in carrying out business activities. Stable profits make it easy for a firm to raise capital as investors prefer a company with stable earnings record than one whose earnings are unstable.
Through advance preparations, risk management can in many cases make it possible to continue operations following a loss, thus enabling a firm to retain its customers and suppliers who might otherwise turn to competitors.
Professional risk managers and insurers contribute significantly by stabilizing businesses through the indemnities they provide, the accidents they either prevent or reduce in severity, the long term projects which they invest in, and the security, they provide by reducing uncertainty.
Why Study Risk Management
We can personally benefit from a study of risk management in the following ways:-
Most people become risk managers at some point in their professional careers.
Even if we don’t become a professional risk managers, our activities will affect the organizations risk exposure and we will in turn be affected by the organizations risks.
We can build professional careers in risk management consultancy.
Conclusion on Risk Management
At any point in life we all have exposures to risks in our life which we must learn to mange effectively. As above is information on Risk Management