Risk management in a nutshell

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Taking risks is one of the activities that sometimes happens in our daily lives. This applies to both social life and professional life, e.g. in the case of running your own business. Because, as you know, running your own business is always associated with taking as well as calculating the risk. It results, among other things, from human nature, which suggests that you should protect yourself against risk in order to predict the effects of future actions. In this article, we present what risk management is and explain the benefits it brings in the company!

Risk management - definition

First of all, in order to correctly define the definition of risk management, it is necessary to understand the meaning of the word risk itself. Well, it is the probability of an event that will have a negative impact on the achievement of the assumed goals, e.g. on the activities of the company being run. Interestingly, the risks may come from within the entity as well as in the environment in which the entity operates.

On the other hand, risk management according to the brochure "Risk Management - General" published by the Audit Department of the Public Finance Sector is "a process carried out by both the management of the entity and its employees, included in the strategy of operations and concerning the entire entity. The purpose of risk management is to identify potential events that may have an impact on the entity (achievement of its goals), to keep the risk within the set limits and to ensure that the organization's goals are achieved in a reasonable and not 100% guaranteed manner ”.

It should be emphasized that risk management has been divided into four successive stages:

  1. risk identification - it consists, inter alia, in determining the type and causes of risk, characterizing and identifying types of risk, identifying potential consequences and identifying entities covered by the risk;

  2. risk measurement - consists in determining the risk hierarchy in the activity, which requires a precise classification of risk. Thanks to this, it is possible to determine the occurrence of the risk and the value of the loss related to its implementation;

  3. risk control - takes place by defining priorities, selecting the right tools and methods, assessing and communicating the strategy of neutralizing or preventing risk. At this point, it is important to use the best combination of actions first;

  4. monitoring and controlling the risk - will involve, inter alia, checking and assessing the effectiveness of the actions taken, and monitoring the types of risk. Importantly, at this stage it is necessary to introduce changes or introduce new risk management processes and consistently apply them.

An exemplary register of risk sources in small and medium-sized enterprises

On the basis of many studies, audits or processes, the most common sources of risks among small and medium-sized enterprises have been distinguished. The table below shows the sources of risk broken down by different factors:

Criteria

Source of risk

Company management

  • collective responsibility,

  • loss of reputation in the market,

  • not introducing the latest innovative solutions.

IT risks

  • data loss,

  • server failure,

  • virus.

Human resources

  • abuse of sick leaves by employees,

  • shrinking labor market,

  • emigration of educated workforce,

  • accidents at work.

Crimes /
security

  • theft in the company,

  • industrial espionage,

  • fraud and dishonesty in the organization.

Financial factors

  • loss of access to capital,

  • late payment of receivables by recipients,

  • loss of financial liquidity,

  • liquidity risk,

  • unpredictable currency market.

Risk management - risk response planning

In order to maintain the risk at an optimal level, a company must take certain actions, which consist in removing or avoiding the risk, or taking it in order to obtain better results. Additionally, risk management may consist in changing the probability and attempting to change the effects or consequences of the risk. Maintaining the risk at the appropriate level is possible by accepting it through an informed decision.

For example, if the enterprise has assessed the resulting risk as not particularly significant, then it will be considered an acceptable level of risk. Therefore, it is possible that the company will not take steps to liquidate it through a conscious decision of relevant persons, e.g. management board members.

The control mechanisms used in the activity should be a response to specific risks. There is no closed catalog of control mechanisms, however, the most common ones are:

  • introducing protection mechanisms for IT systems and resources,

  • business continuity,

  • supervision and documentation of the management control system,

  • specific control mechanisms for financial and economic operations.

To sum up, the risk management implemented in the company does not have to be associated with the need to introduce new or change old procedures. However, an entrepreneur who wants to reduce or eliminate risk, as a rule, should try to find more and more innovative risk management solutions.

What are the benefits of risk management?

In a situation where the company implements and maintains a risk management system at an appropriate level, you can expect certain benefits, which are:

  • increasing the likelihood of achieving goals;

  • improvement of the control mechanism, identification of threats and opportunities;

  • improvement of financial reporting (in the case of complete books);

  • loss minimization - better loss prevention;

  • improving the governance of the organization;

  • improving operational efficiency and effectiveness;

  • improving the running of the company, more active management of the company or adopting solid foundations for decision-making and planning.