What is Risk Management?

Risk management, or risk management, is a systematic strategic planning process within companies that aims to identify, analyze and respond to the risks to which it is subject.

Its objective is to minimize or even eliminate the possibility that these risks will have a negative impact on the corporation and its projects.

Enterprise risk management (enterprise risk management) adopts measures and policies seeking to strike a balance between risk prevention and costs to avoid them. It depends on decision-making by those responsible, which is more effective when based on a good control system.

What are risks in companies?

Risks are future events, conditions or circumstances that may have an impact, usually negative, on a project or undertaking, such as losses or damages.

The concept of risk takes into account both the probability and the frequency with which it may occur and the severity of its consequences.

The types of risks to which a company is vulnerable depend on its activity. We can cite as examples:

  • Loss of inventory or suppliers
  • Losses in revenue
  • Rising costs
  • Loss of important employees
  • Fraud of employees or third parties
  • Poor account management
  • Logistical difficulties in distribution
  • Lack of credit supply
  • Fines and legal proceedings
  • Loss of brand reputation
  • Accidents at work
  • Environmental accidents

What are financial risks?

All companies are subject to financial risks, which are those that can affect the health of their accounts. These risks can occur for both internal and external factors.

In the case of external factors, we can cite economic crises, instability in exchange rates and changes in the market in which the company operates or in government policies as examples.

Internal factors are derived from the company’s own performance. Poor cash management or problems in production and logistics are examples of risks that can have a direct impact on the accounts and, consequently, on their market value.

Controlling this type of negative event is one of the objectives of project risk management processes.

How is project risk management done?

There are several methodologies that aim to manage the risks of a project. However, it is possible to identify some points in common between them. A risk management policy normally takes the following steps:

Risk identification

It seeks to create a list of all risks that may impact the success of a project or the performance of an activity. It is the stage in which it seeks to identify the possible sources of risk.

The mapping is a crucial step in the risk management process and should map in detail all the processes that are important for the company’s good performance, such as the supply chain, the financial sector, human resources, facilities and marketing processes. and sale or provision of services, which are the basis for generating revenue.

Risk analysis

In this step, the probability that each risk will actually occur and its degree of impact would be assessed. This information is necessary to create risk classification parameters.

Prioritization of risks

The objective of this phase is to create a ranking, classifying the risks according to the analysis made in the previous step. Risks that are more likely to occur and more serious impacts should be given priority in prevention.

Risk response planning

It defines the actions to be taken to eliminate the probability of a risk occurring or to minimize its impact, defining, for this, the procedures and techniques to be adopted for each case.

Monitoring and control of risks

It monitors the activities of the companies and the progress of the projects in order to apply the measures that were designed to avoid the risks already analyzed and to identify new threats, taking corrective actions whenever necessary.