Risk management involves identifying, assessing and controlling threats to an organisation’s capital and earnings. The risks may be due to a range of reasons. For any business owner who is interested in protecting the position of the company, doing their due diligence is vital.
For any organisation operating within a market, a number of risks may be present, which threaten operations and eventually finances. It’s the responsibility of organisations to ensure that they find ways to manage risk, which is inevitable.
Doing this can prevent a financial crisis.
The process of risk management typically includes a number of steps:
Identify Risk
At this stage, a company identifies factors that are potential risks to effective operations. These may include risks such as new technology, transforming markets, changing legislation, etc. As soon as an organisation does this, they are then able to put measures in place for how to deal with such possibilities.
Analyse Risk
This involves working out what the consequences of risk will be. The effects of business goals must be understood too.
Evaluate Risk
Determine the magnitude of the risk, as in, how serious it is. Business owners have to take a thorough look at what is at stake.
Treat the Risk
Have a plan for treating risks and create ways to prevent disaster. This may help to prevent a financial crisis. Ignoring things won’t work out well, so it’s important to take action.
Monitor the Risk
Keep tracking what could potentially threaten the business and watch for how it may affect everything.
In the case of a financial crisis, risk management fails due to a combination of causes. It may be possible that risk manager focused on past events.
Failure may also occur when models aren’t equipped to deal with complex instruments that are innovative, but have limited historical data.
Creating a division between risk management and the investment process leads to those managing risk not having the ability to influence positioning and behaviour. This may lead to a further lack of understanding of the investment process.