What is risk management? 9 components and processes

Risk management is an important and urgent issue that every business needs to pay attention to, especially in today's volatile business market. So what are the benefits of risk management? How to effectively manage risk? The answer will be found in the following article by Viindoo. Follow along with us.

1. What is risk management?

Risks are possible future events that prevent the business from achieving its goals. So, risk management (ERM) is a rigorous process that includes identifying, assessing, monitoring, and mitigating events that can present risks and difficulties for businesses.

risk managementRisk management

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2. 8 components of risk management in enterprises

2.1 Internal environment

The internal environment of a company is the atmosphere and corporate culture. The internal environment can be established by upper management or the board of directors and communicated throughout the organization. Organizational culture is often reflected in the actions of all employees.

The internal environment is important in risk management, as it can shape how risks are managed, assessed, and detected. A good internal environment, focusing on governance capabilities, policies and processes, and corporate culture will help businesses risk management better and minimize losses.

The internal environment of the enterprise is related to risk management and Usually includes factors such as:

  • Governance capacity: The ability and experience of leaders and employees when managing risks.
  • Policies and procedures: Policies and procedures are designed to detect, assess, and manage risks.
  • Governance information: The data, information, and reports used to manage and assess risk.
  • Corporate culture: Corporate and employee values, beliefs, and actions towards risk management.

It can be said that internal environmental factors build and form the risk management philosophy of the whole enterprise.

risk management planInternal environment

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2.2 External environment

The external environment is the external factor that affects the business activities of the enterprise. Popular factors have a strong influence such as:

  • Market: Market volatility, changing customer needs, and competition among businesses can increase business risks.
  • Laws: Changes in legal regulations can affect the operation and ability of enterprises to detect and manage risks.
  • Economy: Global and domestic economic conditions can affect your business.
  • Society and the environment: Changes in society and the natural environment can affect a business.

These factors cannot be controlled by the enterprise but have a profound influence on the operation of the organization itself. Therefore, controlling the influence of the external environment is also risk management in the enterprise.

2.3 Objectives of the business

Businesses must always consciously set goals for the business. This goal should be established to support the fulfillment of the business's business mission. These established goals must be in line with the direction of risk management in the enterprise.

Example: A business establishes a reference business plan hope must be aware that the company is exposed to both internal and external risks that are greater than its small goals.

risk managementBusiness goals

2.4 Events

Positive events can greatly affect a company's operations. Conversely, a negative event can lead to adverse effects on the company's business. In the risk management process, enterprises need to identify important business areas and related events that can lead to serious consequences.

These risky events can create significant challenges for business administrators such as natural disasters that close business offices or changes in government regulations that cause businesses' products to be damaged. banned from circulation.

2.5 Risk assessment

In addition to being aware of what can happen, the risk management framework also details the risk assessment step by understanding the probability of occurrence and the effects of the risk on the business of the enterprise. Karma. If a business can fully and accurately assess risks, it can prepare plans and solutions before risks occur, helping to minimize damage and ensure growth for the business. 

risk management toolsRisk assessment

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2.6 Risk response

A company can respond to risk in four ways:

  • Risk Avoidance: This leads the company to abandon the risky activity because it would rather give up the benefits of that activity than suffer the possible adverse consequences. An example of risk avoidance is a company that shuts down a product line and stops selling a particular commodity.
  • Risk Mitigation: This is the company's continued involvement in the activity but efforts to reduce the likelihood or extent of the risk. An example of risk reduction is a company that keeps a product line in circulation but invests more in quality control or educating consumers on how to use it.
  • Risk Sharing: The Company continues to participate in the activity but uses an independent third party to share the risk. An example of risk sharing is purchasing an insurance policy.
  • Accepting the risk: This leads the company to analyze the potential consequences that may occur with that risk and determine if the results are acceptable.

2.7 Control actions

Control activities in risk management in the enterprise include activities to minimize the risk and damage of risks. This includes actions such as: Establishing policies and procedures and implementing testing, evaluation, and monitoring activities to effectively detect and treat risks.

If control activities are fully and effectively implemented, enterprises can reduce unnecessary losses and costs caused by risks, as well as improve their ability to maintain a competitive position. businesses in the market.

2.8 Information and communication

The information and communication element in risk management is the process of transmitting information and interacting between parties to ensure that information arrives at the right time, to the right audience, and in the right way. This helps risk decisions to be made quickly and accurately, reducing risks and contributing to improving business performance.

3. Benefits of risk management for businesses

Risk management brings businesses many benefits, such as:

  • Increase the correctness of business strategies of enterprises.
  • Limit the waste when investing.
  • Supporting businesses to proactively face and respond to risks.
  • Helping businesses increase business investment efficiency.

4. Risk management process

4.1 Risk identification

This is the first step in the risk management process of the enterprise. In this step, businesses need to identify the risks encountered in their operations. Risks are classified into several categories, specifically:

  • Environmental risks.
  • Legal risks.
  • Risks in the business environment,...

Businesses need to identify as many risks as possible. If the business has systematic risk management complete, the information about this is directly entered into the system. This method has the advantage that stakeholders with access to the system can be aware of possible risks.

Thanks to this system, any member involved can easily access it without having to lock into a report via email.

risk managementRisk identification

4.2 Risk analysis

The next step after the risk has been identified is analysis. The organization must identify the links between the risks that may occur with different aspects of the organization.

You need to determine how many business functions are affected by the risk. This helps businesses know how much risk affects the organization's operations. Some risks can put a business in serious jeopardy if they happen, while others cause only a few minor annoyances.

Risk and crisis management
Risk analysis

4.3 Assess and prioritize risks

Enterprises need to evaluate and rank the priority of risks to choose an appropriate management solution. The risks of causing minor inconveniences are assessed as low. At the same time, the risks that have a profound impact and create severe consequences are assessed at the highest level.

risk management
Risk assessment

On the other hand, this assessment can help business managers have a clearer view of the overall picture of the level of risk of the organization. Some low-level risks can affect the business but do not need the intervention and resolution of superiors. In contrast, even a high level of risk requires management involvement.

Risk assessment is carried out in two main ways: qualitative and quantitative.

  • Qualitative assessment: Most of the risks a business may face cannot be quantified. For example, enterprises cannot quantify disaster risk as a whole, but can only assess it through certain aspects. However, enterprises need to ensure objectivity and accuracy in the process of qualitative risk assessment of the whole enterprise.
  • Quantitative Assessment: This method is often used to assess financial risks. The reason is that the financial sector focuses on handling numbers such as money, interest rates, and discounts,... Quantitative assessment is considered to be more objective and easier to automate than qualitative.

4.4 Determine how to deal with risk

After assessing the level of risk, businesses need to determine the appropriate way to deal with it. Here are some solutions that businesses can refer to:

  • Risk transfer.
  • Prevent and reduce damage.
  • Take risks.
  • Avoid risks.

4.5 Continually monitor and assess risks

Once risk management processes are in place, businesses must ensure that the process is followed closely. This means that businesses need to always monitor and assess risks.

risk managementContinuous monitoring and risk assessment

Through the above article, the basic information about risk management was summarized in detail. We hope that this information of Viindoo will help you build an effective risk management process.

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What is risk management? 9 components and processes
Viindoo Technology Joint Stock Company, Amber Nguyen March 16, 2023