Risk Management: Definition, Components, Types, and Examples on Business

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Risk Management: Definition, Components, Types, and Examples on Business

risk management

Every day we make a decision. One decision to deliver us to a result which ultimately requires to make another decision. Each result that appears can be a good or bad result. No guarantee everything will appear well. The possibility of the emergence of bad consequences we usually call risk, and for this you need good risk management.

In business there are many decisions (actions) made. That makes more and more risks that might occur as a result. The more risks exist, the greater the possibility of really happening. Such a thing is certainly dangerous for a business. Therefore, if you have a business, you must take actions that reduce the risk of happening.

Understanding of risk management

Management is an effort to manage certain things. Meanwhile, the risk is an unpleasant effect of an act or action. So, risk management is a methodology to avoid bad consequences that might occur.

Risk management component

Risk management components are as follows:

Internal environment

The internal environment is an environment formed in an organization / company as a result of philosophy, operational style, and corporate organizational structure. The internal environment has a major influence in an organization so that the organizational structure, work culture, and authority delegation must be clear and written.

Target determination

In order to get to the company’s goals, you must first determine the target first. Determine what company goals so that the risks that might occur are more easily identified and managed. Therefore, all activities carried out by management will direct and support the company to arrive at the specified objectives.

Identification of events

Management must identify events that have the potential to influence the strategy and achievement of company goals. These events can have a positive or negative impact.

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Risk Assessment

After identifying events that have the potential to influence efforts to achieve goals, the next management step is to assess the events. Does the incident bring the company to the purpose? Or even distance from him?

Risk response

After risk assessment, the company must determine the response to the risk. The response can be avoiding, reducing, moving, or even accept it.

Control activity

This process is a policy making to ensure that a predetermined response is carried out properly.

Information and communication

Management must identify information and communicate with related parties so that everyone can carry out their duties properly.

Monitoring

In this component, management monitors to ensure that each component goes well.

Type of Risk Management

Types of risk management include:

Operational Risk Management

This management is related to disruption of company operational activities arising from the failure of internal functions such as human error, system failure, natural disasters, and others.

Hazard management

This management is related to risks that have the potential to result in bankruptcy or damage.

Financial Risk Management

This management is related to efforts to protect profit, property rights, and company assets.

Strategic Risk Management

This management is related to decision making in the company.

Example of Risk Management

Say you are a leader of a company. At one time, your company’s competitor made a big breakthrough. At this point, you with the management team must immediately consider events that might occur.

Then, determine whether the impact will be felt by your company is good or bad. After that, determine how your company will respond to the risk. Finally, you have to oversee the company’s activities to run according to predetermined responses.

Conclusion

Risk management is a method for facing future risks that can affect the company’s activities. This process begins by identifying the possibility of events in the future, the risk assessment it caused, the determination of the response to it, and the monitoring of the response.

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Another big risk that will be met on business is where your company does not use correct books. Without bookkeeping, your company will cause various problems related to financial recording and planning your business in the future.

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