What Is Risk Management?

Each of us regularly faces risks in everyday life and at work. Risk management is not just a theoretical and abstract topic of corporate rallies. When used correctly, it is a decision-making tool that is often and undeservedly neglected. Therefore, before supervision, the task is not so much to avoid, as to manage them and thereby increase the efficiency of the company's activities.

Risk Management Standards

It is important to plan a set of measures to reduce and prevent negative consequences. This is the only way to ensure the survival of the project. Risk management standards are carried out in the following main areas:

  • Prevention and limitation of risk, which includes a preliminary examination of options for the decision and assessment of appropriate levels of risk. But this approach does not take into account many effective elements, so most of the expert assessments are reduced to financial control measures and compliance with legal and corporate standards;
  • Use of various kinds of guarantees, diversification of risks, development of control systems, etc.;
  • Compensation of losses by creating special insurance and reserve funds.

Risk management is represented by three interrelated stages:

  • Identification. This step means clearly define the type of risk, i.e., whether it concerns tangible or other assets of the company.
  • Risk assessment consists of two parts: the calculation of the impact and the evaluation of the probability. It is significant to determine the degree of possibility of a particular outcome, including the predicted repeatability and impact of the predicted result. The simplest methods are either expert or historical evaluation of the consequences of an event.
  • Development of a management strategy. Here you need to have a clear idea of ​​how management will take place, given the options available.

Risk Management Approaches: Application Features

Among the methods of risk avoidance is

  1.  the rejection of unreliable partners and risky projects;
  2. insurance of probable losses;
  3. the dismissal of incompetent workers and the search for guarantors.

The functions of the latter can be performed by various entities, such as foundations, state bodies, enterprises, while the principle of equal mutual utility must be observed.

Risk localization methods are used in rare cases when it is possible to fairly clearly identify the sources of their occurrence. These include

  1. the creation of venture enterprises as an independent legal entity;
  2. the formation of special structural units for the implementation of risky projects;
  3. conclusion of agreements on joint activities.

Methods of risk diversification are the distribution of the overall risk and responsibility between the project participants, as well as the diversification of activities, management areas, markets and supplies, investments and work stages. This improves the observability and controllability of processes and makes it possible to correct them relatively easily if necessary.

Methods of compensation for risks are associated with the creation of mechanisms for hazard prevention. For their effective application it is necessary:

  • strategic planning of activities, which allows to anticipate the emergence of bottlenecks in the implementation of projects, identify sources of threats and develop a backup plan;
  • prediction of the external environment, i.e., periodic development of scenarios for the assessment of the future state of the environment for the project participants;
  • monitoring the socio-economic and regulatory environment, which involves the current information on relevant processes. The received data will allow catching tendencies of development of mutual relations between managing subjects and will give time for preparation to standard innovations;
  • creation of a system of reserves, such as insurance stocks of raw materials or cash;
  • training of personnel and its instruction.

Risk Management Strategies and Processes

Consider the most common risks in the activities of a regular organization.

  1. Loss of product uniqueness. The solution is to develop a new advantage or use a backup.
  2. Complex geographical location. The decision is to provide for the costs of solving transport, environmental, climatic problems, create access roads, organize the transportation of employees, and improve logistics.
  3. Sources of raw material supply. The verdict is to always have alternative ones.
  4. Problems with engineering networks or communications. The right choice is to provide the enterprise with alternative communication lines.
  5. Own solvency. The solution is the control of borrowed funds, the reservation of net profit.
  6. Supply volatility. The decision is price reduction, advertising costs and the search for new market segments.
  7. Tax increase. A good choice is optimization of tax payments, application for tax benefits, lobbying for the project.
  8. Decreased solvency of consumers. The solution is a reorientation to another market segment or a change in the production profile.
  9. Rising prices for raw materials, transportation. The verdict is a willingness to reduce net profits, increase prices for own products.
  10. Lack of skilled labor. The solution is the cost of training, the acquisition of technologies that do not require high-skilled workers.

This is not a complete list of possible risks that must be constantly borne in mind.

Thus, risk management careers are one of the complex areas, as it is at the intersection of various spheres and requires practical skills in strategic, financial and investment supervision. But it should be remembered that the very concept of risk is a purely subjective phenomenon. Depending on the expectations of the supervision of a particular company, the same negative or positive results are treated differently. Any event or change of external factors for some entrepreneurs brings an income, for others is a loss. But no event in itself cannot bear as a risk.