Risk management is a process that allows individual risk events and overall risk to be understood and managed proactively, optimising success by minimising threats and maximising opportunities.
Risk management begins with the practice of identifying risks. In this process, we consider future events or conditions that may impact our ability to achieve our goals. Risk identification includes figuring out where, when, how, and why such events may occur.
As risk management is such a critical area, it is vital that senior leadership in any organisation are seen to be closely involved in its development and implementation. Only by doing this will its true importance be fully appreciated by staff.
There are many reasons for this correlation, not least because the greater your size the more attractive target you can be for outsiders. Plus, with greater size, it can be more challenging to manage every department equally.
Risk identification should begin early in the project when uncertainty and risk exposure is greatest. Identifying risks early allows risk owners to take action when the risks are easier to address. Risk owners who execute early responses often reduce cost as compared to addressing risks and issues later in the project.
Project managers should continue to work with the project team throughout the course of the project to identify risks. It is impossible to identify all the risks at the beginning of a project. Things change over time that may lead to new risk exposures.
For each risk you identify, quantify it according to the seriousness of its potential impact. Is it a high, low or medium risk? Similarly, for each risk, consider potential actions and the amount of resources you are willing to expend.
In some cases you may believe that your company is resilient enough to handle the impact. That’s great. In those cases, you can just accept the risk. On the other hand, there may be risks that debilitate your company. Those risks warrant a significant amount of resource to avoid. In most cases, the risk will fall somewhere in the middle – it cannot be avoided or accepted – so your strategy should focus on mitigating the impact.
All risks should relate to at least one of the project goals (time, budget, quality, etc.). A good practice is to walk through each goal and ask: What may hinder the accomplishment of the goal? What opportunities should be exploited?
Remember– the road is long. Always keep a long-term perspective. You may encounter risks along the way that set back your company. Accept it as part of the business environment and keep moving forward. But also take it as a reminder that risk management is an essential part of business strategy and you should be putting it into your planning.
Before others do business with you they will want to be sure that they’re not putting themselves in any kind of risk so they are likely to want full assurances that this is the case. When the success of your business hinges on having a robust risk management strategy it really does help focus the mind.
Not sure about financial risk management training? Find out more about financial risk management courses and book on to a FRM course we can offer you.
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