Every business decision comes with a risk. So it is not about just wanting what is best for the company. That desire itself is a risk because it is at the cost of something that can backfire or not go as planned. Risk is the probability of a negative outcome in a thing, and every investment comes with a level of uncertainty. Click to read more - Risk
Can you avoid risk? No. But can it be managed? Of course. Since you cannot avoid risk, what matters is how can it be managed to reduce the possibility of a negative outcome. To know when to stop and when to give in more.
What is Risk Management?
Risk management is the process of identifying, assessing, and working to reduce the possibility of a negative outcome in an organisation’s investment - capital and earnings. It is about understanding the potential loss from an investment and steps that can be taken or not taken to reduce loss or ensure a better outcome.
Another thing risk management addresses is the question of if it is worth it. Also identified and assessed is the amount of risk associated with the expected returns. An investment that carries high risk should promise an interest rate that compensates for the risk.
The consequence of a risk that has materialised can be as severe as the company closing down. Risk management helps you to prepare for the unexpected. Actually, it is an enquiry into the unexpected to make it expected and prepared for or avoided.
Importance of Risk management
Risk management is not only about the nature of an investment. It is an approach to management. Risk management equips companies with information and tools to make better decisions. It helps create a consciousness of what is at stake and what action or inaction means for the company.
Risk management also creates room for businesses to learn as they grow and improves their chance of success in the market. If you can foresee and avoid blows that would have sent your business crashing down, then you have learnt more than a few valuable lessons on growth and success.
In addition, it helps to focus on what matters, what they mean for the business and the company goals. It filters what steps to take or not to achieve those goals. It helps to set up procedures for reaching set goals and eliminating distractions on the way.
Risk management also helps to protect the staff and create an enabling work environment. It shields the people and assets involved in the investment process and signals when bravery begins to take the shape of stupidity.
Risk management is not only to be considered when investing. It is relevant in every aspect of running a business because nothing is certain in business. It is good to conduct a periodic risk analysis to determine the state of the company and take necessary steps to improve it.