Every business deals with risk on a near-daily basis. Unlike in the past, there are now professionals that use mathematics, financial theory, and statistics to analyze the costs associated with risks and uncertainty for businesses, says a blog published by E.H.Thomson. With predictive modeling and real-time data, they can develop the financial risk assessment process into an accurate and effective strategy for making business decisions that minimize material risks.
Risks can appear in different forms and you should properly assess the ones that apply to your business. Here are four things that you should consider when developing a risk management strategy:
#1 Identify Existing Risks
Before risk assessment, all potential risks should be properly identified, organized by risk category (financial, strategic, operational, compliance) and sub-category (market, liquidity, credit, etc.) for business units, corporate functions, and other organizations, according to an article published by Deloitte. It will help you in arranging them in order of priority so that you can deal with the significant ones urgently.
#2 Assess the Risk
The purpose of assessing the risks is to understand them, their potential impact, and the likelihood of such scenarios. It will allow you to make an informed decision regarding prioritizing any responses, according to an article published by the Rochester Institute of Technology. During risk assessment, you should consider the worst-case scenario, even if it could thrust your company’s solvency into question. This way you can better develop a strategy to recover from the potential material losses.
#3 Develop Preventive Mechanisms
You should have a contingency plan in place if an adverse risk occurs. Developing such a plan involves:
- Identifying the contingency plan steps that can be immediately implemented and followed as per a schedule
- Allocating necessary resources such as money, equipment, and labor
- Informing and training those who are directly involved in executing the plan
- Reviewing and updating contingency plans if necessary
#4 Track Progress
Once a contingency plan is in place, risk factors and events should be monitored to look for trigger events that have been documented during the risk assessment. If such an event occurs, the responsible team should enact contingency plans as deemed appropriate to mitigate risks. Even after the risk is contained, you should continue monitoring. It will help you identify new risks before they turn into urgent threats to your business.
Remember that risk management is an ongoing activity that continues throughout the life of your business. With the help of these preventive strategic tools, you can always stay on top of adverse situations. You can develop risk assessments even at the inception of a new business to be best-prepared right from the beginning.