Risk is commonly defined as any uncertainty which, if it occurs, will have an effect on achievement of one or more objectives.
It is a combination of probability of an event and its consequences. In managing personal risk, we must first specify our personal objectives. Ultimately, we aim to be happy, healthy, wealthy, and wise. With this objective, we can now identify and manage strategic personal risks which might affect these goals. This might require us to address important issues such as our key personal relationships, diet and exercise regime, or investment and pension policies.After defining objectives, the next step is to identify risks, including both threats which could hinder us as well as opportunities which could help us.
For a personality development objective for example, I might invest in attending seminars and trainings which does not provide the required new skills or knowledge that I need. Assessment comes after risk identification, estimating the probability and impact of each identified risk to prioritize them for further action.In this stage, we must think of what should be done to minimize threats and maximize opportunities, for example, research available training courses. Finally, identified responses need to be implemented, and their effect should be monitored, to check whether they are moving towards our objective. In business, Risk Management involves identifying, analyzing, and taking steps to reduce or eliminate the exposures to loss faced by an organization. The practice of risk management utilizes many tools and techniques, including insurance, to manage a wide variety of risks.
Every business encounters risks, some of which are predictable and under management's control, and others which are unpredictable and uncontrollable. Risk management is particularly vital for small businesses, since some common types of losses—such as theft, fire, flood, legal liability, injury, or disability—can destroy in a few minutes what may have taken an entrepreneur years to build. Such losses and liabilities can affect day-to-day operations, reduce profits, and cause financial hardship severe enough to cripple or bankrupt a small business.But while many large companies employ a full-time risk manager to identify risks and take the necessary steps to protect the firm against them, small companies rarely have that luxury.
Instead, the responsibility for risk management is likely to fall on the small business owner. Businesses have several alternatives for the management of risk, includes transferring the risk to another party, avoiding risk, risk reduction, and risk retention. In risk transfer, another party is accepting the risk in exchange for another consideration, this is typically by contracts.For example, getting a life insurance is one type of risk transfer thru the use of contract. Risk avoidance means not doing an activity that could cause the risk, for example, in order to avoid financial loss, entering into a business should not be done.
In reducing the negative effect of the risk, plans must be made to reduce the severity of the possible loss, for example, installation of fire alarms in any establishment can reduce casualties in case of fire. Risk retention is accepting the loss when it happened, this may be so if the costs of insuring against the risk is greater over time than the total loss sustained.Risk management should be a continuous and developing process which runs throughout the organization’s strategy and implementation of that particular strategy. It should address methodically all the risks surrounding the organization’s activities past present and future.
Ideally, a prioritization process is usually done in risk management whereby the risks with the greatest probability and loss are handled first, and the risks with lower probability of occurrence and lower loss are handled in descending order.Risk management must be integrated into the culture of the organization with an effective policy and a programme led by the top management. It must translate the strategy into tactical and operational objectives, assigning responsibility throughout the organization with each manager and employee responsible for the management of risk as part of their job description. It supports accountability, performance measurement and reward, thus promoting operational efficiency at all levels.
