Finance

Risk Management Definition: Informative Guide

Risk Management Definition is today’s post which i will give you a detailed guide and how to manage it especially in a business. In a simpler way you can define risk management as a process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.

You can give the above definition as your risk management definition but to make it better, you can define it as a set of strategies for analyzing potential risks and instituting policies and procedures to deal with them. The work of assessing the possibilities, setting priorities, and finding cost-effective solutions is also described as business continuity planning.

In a business environment, some risks, such as economic pressures or technology meltdowns, are universal while others are unique to a particular venture or physical location.

Risk Management Definition

Risk management definition

Risk Management definition is the process of identifying, quantifying, and managing the risks that an organisation faces. As the outcomes of business activities are uncertain, they are said to have some element of risk.  These risks include strategic failures, operational failures, financial failures, market disruptions, environmental disasters, and regulatory violations. Risk is a statistical concept that is measured using statistical concepts that are related to the unknown future. Almost all investments are exposed to it.

You can also that Risk management involves identifying the types of risk exposure within the company, measuring those potential risks, proposing means to hedge, insure or mitigate some of the risks and estimatin the impact of various risks on the future earnings of the company.

While it is impossible that companies remove all risk from the organisation, it is important that they properly understand and manage the risks that they are willing to accept in the context of the overall corporate strategy. The management of the company is primarily responsible for risk management, but the board of directors, internal auditor, external auditor, and general counsel also play critical roles.

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Risk Management definition can be given as a risk means the likelihood of potential harms from a known and identified source of hazard. It is measured in terms of the chance of being exposed to those hazards. Organizational management has procedures to systematically identify and evaluate the hazards and to avoid encountering them. Organizations formally establish processes to identify hazards, assess the risks involved in all aspects, manage until the risks are eliminated, reduced or controlled up to a level being acceptable.

All these are definition of risk management and next is to look into the process of risk management

Risk Management Process

The risk management definition, we also have the process which is of four stages:

  • Identification – proactive identification, Incident reporting, safety inspections, risk audits, safe design and purchasing, consultation.
  • Assessment – likelihood of the hazard and risk, degree of harm, frequency and duration of exposure, severity of the hazard or risk. A risk assessment evaluates an organization’s exposure to uncertain events that could impact its day-to-day operations and estimates the damage those events could have on an organization’s revenue and reputation.
    1. According to The Institute of Risk Management, “This requires an intimate knowledge of the organization, the market in which it operates, the legal, social, political and cultural environment in which it exists, as well as the development of a sound understanding of its strategic and operational objectives.”
      Effectively assessing and analyzing an organization’s risks helps protect assets, improve decision making and optimize operational efficiency across the board to save money, time and resources
  • Control of hazards and risks – good knowledge about hazard, risk, cost associated and available options determine which would be desirable. The process beginning with the most preferable to the least preferable includes:
    1. Elimination through design
    2. Substitution by replacing materials, equipment or processes
    3. Engineering by controls, mechanical aids, barriers, ventilation or insulation
    4. Administrative control through job rotation, changing work tasks, procedures and training
    5. Personal protective equipment (PPE) to reduce potential exposure.
  • Monitoring and controls – hazards may change and that risk control measures need to be reviewed continuously to determine their effectiveness.
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Ways Which One Can Control Risk

In risk management definition, we can manage risk in a number of ways:

– Not doing whatever it is that carries the undesirable risk.

– Diversification: not putting all our eggs in one basket.

– Hedging: in finance this means strategically using financial instruments in the market to offset the risk of any undesirable price movements. Put simply, the investor hedges one investment by making another.

– Purchasing insurance: transferring the risk to an insurance company

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