How to Manage Risks in a Business?
16, Feb 2022
Hey there! Welcome back again. Do you know one of the most critical factors to be kept in mind while starting any business is the various risks involved? While the end goal is always to succeed, however, business risks are bound to obstruct the organization’s potential to maximize profits. One cannot mitigate the various risks totally, but they can be managed by adopting risk management strategies to be better prepared during uncertain times. Let us now understand what are the different types of risks involved and how to manage them. Let us quickly find out.
Before we understand how to manage risks in a business, let us first understand what these risks are.
-
- Financial risk:
- This kind of business risk may arise because of credit being extended to customers or might be because of the company’s debt load.
- Fluctuations in the rate of interest can also be a big threat. Businesses face financial risk when certain decisions that affect the cash flow or the ability to pay back debt are made.
- Financial risks are very common and are present everywhere. Credit risk, liquidity risk, foreign investment risk, equity risk, currency risk, asset-backed risk are all common types of financial risks.
- Financial risk:
-
- Reputation risk:
- While running any business, there is always a threat of customers being unhappy, not satisfied, product failure, negative press, etc, which can have a very negative impact on the brand reputation.
- It takes just one negative tweet or one bad review for the brand reputation to start decreasing.
- The best way to reach them is by replying to tweets/comments immediately, and the quality must be kept in mind to avoid any kind of lawsuits.&
- Reputation risk:
-
- Operational risk:
- The third type of risk is operational risk. This type of risk may arise due to internal risk or external risk or a combination of both.
- Unexpected events could be because of any natural disaster which may ruin the physical presence.
- The operational risk may also be caused due to several technical reasons like power cuts, etc.
- Operational risk may also be people-related. Minor mistakes can also cost time and money.
- Process failure can also lead to operational failure. Businesses can address such risks by conducting training and development strategies and must ensure business continuity.
- These sessions would help in understanding what went wrong. A backup must also be created to take proactive measures for ensuring that business operations are not affected.
- Operational risk:
-
- Security and Fraud risk:
- The fourth very common type of risk is known as the security and fraud risk.
- There is always a threat of hackers getting hold of personal data.
- This kind of risk ultimately hampers the brand image and leads to trust issues.
- The business organizations would have to invest and ensure security solutions, make use of fraud detection tools, and educate customers on how to detect any potential issues.
- Security and Fraud risk:
- Competition risk:
- Competition risk is a kind of risk that cannot be completely eradicated and remains constant right from the introduction stage till the decline stage.
- Constant reassessments must be done with regards to performance and strategies, and there should be regular interactions with the target audience and frequent customers.
- An eye must also be kept on the competitors and the new entrants in the industry.
Apart from this, there are various other risks as well which affect the business such as Economic risk, Compliance risk, etc, which are beyond our control. Let us now see how to manage these risks:
- The very first thing which can be done is to prioritize the risk and threats. This can be done using a universal scale that indicates each risk’s likelihood and occurrence. It may either be very likely to occur, some chance of occurrence, small chance of occurrence, or very little chance of occurrence. Risk always must be put under the topmost priority, and a proper plan must be made to prevent it. One thing to be noted here is even if a risk falls under a small chance of occurrence yet represents financial damage, then it must be taken as a priority.
- The easiest way to mitigate risk is by purchasing insurance. Purchasing insurance helps in transferring risk to the insurance companies for minimum cost. This cost is comparatively very little compared to the potential cost of uncovered risk.
- Risk can also be mitigated by ensuring a quality assurance program. Customer service is the key to ensuring success. One must keep testing products and services to assure the highest quality. One must take additional steps by evaluating and analyzing the testing methods.
- Limiting high-risk customers is another way to reduce various risks. This is very important for small businesses. A rule must be implemented stating customers having poor credit must pay ahead of time which helps in reducing complications. A system must be generated to identify poor credit risks far in advance.
- The best way to ensure very little or no risk is by appointing a risk management team. A separate team must be formed that is always ready to prevent, mitigate, or eradicate such risks and threats.
These steps must be taken into consideration as it helps in shaping a risk management plan. This is the starting point. If you wish to be an expert, then you must enroll in the FRM course, also known as the Financial Risk Manager course. The FRM course details are as follows:
The FRM course syllabus includes the following topics:
- Foundation of risk management
- Quantitative analysis
- Financial markets and products
- Valuation and risk models
The FRM course duration is a minimum of one year. One year is sufficient to complete both parts of the FRM examination. To know more, please feel free to contact our counsellors, who would be glad to help you make the right decision. All the best and happy learning!
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