What is risk management? Effective risk management roles and processes

Risk management is always focused on by organizations and businesses because if this activity is not strictly implemented, businesses may experience financial and reputational losses. So what is risk management? What role does this activity play for the business? In this article, 1C Vietnam will introduce in detail relevant useful information, contributing to answering the above questions.

1. What is risk management?

Risk management is the process of identifying, analyzing and controlling unexpected situations and events that may impact the business in the future. This process is often carried out by management and leadership with the goal of preventing or minimizing negative impacts, and at the same time, businesses can limit the level of risk by proactively preventing bad situations that may occur. can happen.

2. The role of enterprise risk management

Risk can appear directly or indirectly, originating from many causes, including errors in strategic management, natural disasters or financial uncertainty. Therefore, when managing risks, businesses can easily achieve business goals, specifically:

• Make the right decisions in business strategy: Financial risk management helps organizations identify and evaluate unexpected situations that can affect the business strategy of the business. From there, managers have a basis to make accurate decisions, consistent with the business's ability to accept risks.
• Proactively respond to risks: Management activities allow the company to develop plans to respond to possible risks. Therefore, when unexpected situations occur, businesses can proactively respond, minimize damage and restore business operations quickly.
• Improve efficiency in business investment: By accurately identifying and evaluating risks, businesses can minimize unnecessary costs when investing in projects. This is an important factor, contributing to improving the efficiency of resource use and increasing the success rate of business development activities.

3. 4 types of risks businesses need to control effectively

To survive and develop, businesses need to recognize and manage risks effectively. Below are 4 types of risks businesses need to pay attention to:

• Strategic risk: Is the risk related to a business's strategic decisions, including selecting target markets, developing new products, expanding business scale, etc. If this decision is not If it is not effective, businesses may face serious consequences, even leading to failure.
• Operational risk: Is the risk related to the daily activities of the business such as: Products/services that do not meet customer requirements can lead to reduced sales, loss of reputation and reduced market share. ; Inefficient production/business processes can lead to increased costs, reduced productivity and profits; Shortage of human resources, lack of qualifications and capabilities of employees, etc. can affect the quality of products/services and the performance of the business.
• Financial risk: Is the risk related to activities including: Interest rate fluctuations can affect capital costs, profits and asset values of the business; Exchange rate fluctuations can affect the asset value, revenue and profits of the business; Fluctuations in prices of goods and raw materials can affect production costs, profits and selling prices of products/services.
• Compliance risk: Is the risk related to compliance with legal regulations and corporate regulations. These risks may include: Violating the law leads to penalties from state agencies, even leading to business bankruptcy; Violating rules leads to discipline, dismissal of employees, and affects the reputation and image of the business.

4. Risk management process applied to businesses effectively

A successful risk management process must meet legal, internal, social and ethical objectives, as well as monitor new technology-related regulations. Specifically, the applied business management process should include the following four important steps:

4.1. Identify risks

Identification is the first important step to take to effectively manage business risks. This is the process of identifying and assessing threats to the organization, including IT security threats such as malware, ransomware, etc. that can disrupt business operations.

To accurately identify risks, businesses need to pay attention to the current context, including legal regulations, market trends, technology and financial markets. From there, business units can classify risks into main groups such as strategic risks, financial risks, operational risks, compliance risks and reputation risks.

4.2. Analyze and evaluate risks

Analysis is the process of identifying and evaluating potential risks that may occur to a business. The purpose of the analysis step is to determine the severity and rank risks according to importance. Risk assessment is usually done by estimating losses, loss of revenue, recovery costs, damage to reputation and image, etc.

Risk analysis and assessment helps businesses better understand the situation the company faces. From there, leaders at all levels can make more informed decisions and establish appropriate measures to minimize damage.

4.3. Risk handling

Below are risk handling methods that companies can refer to and choose appropriate handling measures for the situation and specific characteristics of the business, specifically:

• Avoid risks: Do not participate in activities that can negatively affect the organization, appropriate when the risk has great damage and the possibility of the risk occurring is high. However, this method can cause organizations to miss many opportunities to increase revenue and profits.
• Risk mitigation: This method accepts risk, but also focuses on minimizing losses and preventing spread.
• Risk transfer: Through insurance contracts, businesses can transfer property risks to the insurance unit. When a loss occurs, the company in charge will be responsible for compensating the business.
• Risk sharing: Transferring the possibility of loss from the individual to the group, this solution is suitable for systemic risks.
• Maintain and accept risks: Suitable for small risks but big benefits.

4.4. Monitor and improve

Finally, administrators need to perform the following monitoring and improvement tasks to ensure effective risk management in the enterprise:

• Monitor and track risks that are serious or likely to occur.
• Evaluate the effectiveness of risk treatment measures, especially for risks with high severity.
• Regularly update business and risk situations to make timely adjustments to the risk management plan.
• Consider new risks that may arise to have appropriate response plans.

Thus, risk management is a necessary and important process for every business, helping to minimize negative impacts, improve operational efficiency and achieve set business goals. To do this effectively, companies need to build a comprehensive problem management system that is suitable for the specific operations of the unit. Don't forget to refer to other useful articles about corporate governance on the 1C Vietnam website.