Risk Management Process: Meaning and Importance

Risk Management Process: Meaning and Importance

Risk management plays an important role in any business. Since every business has a risk involved in its activities, it is important for the business managers to identify the associated risks and take necessary actions to minimize or eliminate the risks. The risk management process is considered as the framework for the actions that need to be taken by the relevant parties in eliminating or minimizing the risk involved.

Based on the type of the business, impact from the internal and external factors, the associated risk can vary from business to business. Since the risk has a direct impact on the business failure, risk management is considered an important business practice that helps businesses to identify, evaluate, trace, track and minimize the risk impacts and improve the risk mitigation process in the business.

The risk management process can be practiced both formally and informally. Usually, small businesses practice risk management informally while large-scale businesses assign a risk management team to identify and mitigate the risks.

Every business is expecting to achieve stability and growth in the market while achieving its goals and objectives. Risk can be identified as the factors that create adverse impacts on business growth, stability as well as existence in the market. Not knowing about the risks involved in the business activities can create adverse impacts as well as both financial and reputational losses. Not having a clear understanding of the risks can cause loss of market share, financial losses, reputational damages to the brand name, safety risks, and regulation breaches as well.

This highlights the importance of the risk management process in the business as a crucial part of success and stability. Due to this, businesses keep a dedicated person or a team based on the business size to implement and maintain risk management processes.

People who work in the risk management area should monitor and gain a proper understanding of the organization and its internal and external environment. The risk management team in any organization works as a shield that protects the organization from existing and potential risks. Analysis methods such as SWOT, PESTEL, and Porter’s five forces analysis can help the risk team to understand and evaluate the business type, risks involved with business activities as well as the risks that may occur in the foreseeable future. That makes it important for the risk team to continuously monitor and evaluate the business environment changes in order to identify the risks in the changing business environment.

A business that has the capability in identifying and predicting current and future risks will always be at an advantage. Risk identification can help the business to manage its finances accordingly and focus more on overcoming the negative impact created by the risk factors.  

A business that has the ability to assess the risk impact and figure out a safe method to continue the business activities can achieve a major competitive advantage over the competitors in the market. Since the risks are the barriers that stop the business from achieving the goals and objectives, avoiding and minimizing the risk impacts and establishing safe business processes can be advantageous in the short run as well as in the long run.  

The importance of maintaining a proper risk management process can be summarized as below.

– Empowers the business with the necessary tools and processes that can identify, minimize or eliminate the existing and potential risks.

-Helps the business to define its future objectives.

– Assist managers with necessary risk information that they can use in decision making and create a safe and risk-free business process.

– Help the risk team to identify the potential risks and convert them to business opportunities.

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