Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment.
Risk is one of the significant matters that one should expect in his business. It occurs in virtually every aspect of businesses and need to be managed properly is such a way that the losses remain minimized. Risk management is critical today because it prevent from saving the company the whopping cost that would have accrued.
Risk management deals with analyzing, identifying, acceptance or prevention of uncertainties in a business or any other setting. It is one of the cores of decision making in investment. The risk factors have to be carefully analyzed before the right decision can be made prior to investment. Put in a simple term, this concept involves the analysis and quantifying of the possible losses in the investment and also the appropriate action taken to control it. Risk management must be carefully done because the inadequacy in this area can result to dangerous aftermath.
Processes in Risk Management
Risk management can be sub-grouped into two step processes in order to track the risk and control it.
1) The risk or risk factor that particular investment presents has to be determined.
2) The risk is then handled with the best approach. This is usually done in line with the objectives that one has as per the investment.
Every business process can be classified in terms of risk management. This is because the risk is present in virtually every action taken in the business environment. For instance, risk management is required for appropriate management of inventory. The risk factor has to be calculated before the right quantity of stocks adequate for a given firm at a particular season will be determined.
Effective Risk Treatments
The identification of risk is an important aspect of risk management. This is significantly important to identify the risk factors that are present in a given investment. However, after identifying and accessing the risks involved in an investment, the following processes are leveraged for the risk treatments:
- Avoiding participation in the investment, or if interest has already been indicated, this might imply withdrawal.
- Reducing the amount of money put into an investment.
- Sharing, transferring or simply outsourcing the investment. One can also insure the business by taking risk cover from the insurance company.
- It is also possible to retain and make appropriate budget for the risk.
What to Look Out For In Risk Management
A risk management approach or method should possess some important characteristics to be deemed effective. An overview of some features and characteristics is as follows:
- That should be an integral part and parcel of the organizational process of business or enterprise.
- Risk management should be integrated into the processes of decision making in the enterprise.
- It has to rely on the available information. In other words, the information available determines how accurate the approach for risk management.
- It has to address the assumptions and uncertainties with clarity.
- The human factors or workforce in a work environment or any other place in consideration need to be taken into account during the process of risk management.
- There is a need to assess and go through the risk management processes continually to ensure that it is top notch.
- It should be based on state of the art technologies to ensure the accuracy of the available data.