In today’s highly volatile market, risk management is crucial for businesses of all sizes. Companies need to develop a risk management strategy to tackle unforeseen market events and challenges. For this particular reason, they must be familiar with various risks. Certain risks impact every kind of business, such as economic risks. In contrast, some are unique to the business’s operational environment, such as operational risk or legal risk.
Each risk has the potential to disrupt business operations and derail profitability. Therefore, companies must devise a risk management strategy to anticipate and mitigate oncoming risks. This article will discuss four essential steps for developing your risk management strategy.
Step 1 – Risk Identification
The first step involves identifying all the risks that can potentially impact the organization. Two strategy planning tools can be utilized for this. The first one is PESTLE which is a situational analysis to identify risks. PESTLE allows you to determine the political, economic, social, technological, legal, and environmental factors affecting the organization. These factors are then reviewed for their likelihood of being a risk for the organization in the next step—operational analysis. SLOC is used to identify the Strengths and Limitations of the organization internally and unearth the Opportunities and Challenges present in their working landscape.
Companies must hire competent finance experts to efficiently carry out such analysis and develop a robust risk management strategy. So, look for experts who have pursued finance in MBA degree as they possess essential business knowledge alongside critical financial skills. They’ll not only help develop financial strategies but also assist in executing them and ensuring that they comply with financial standards.
Step 2 – Risk Assessment
In this step, assess the identified risks for likelihood and impact. First, evaluate the probability of each risk by classifying whether the threat has a high, medium, or low probability of occurrence. Secondly, assess the impact of the risk on the organization. Afterward, classify each risk by calculating whether the risk occurrence will have a high, medium, or low impact. Using the classification of likelihood and impact, you’ll eventually determine the severity of each risk.
For instance, a risk with a high probability of occurrence and a low impact would not be classified as severe. However, those with a medium likelihood of occurrence and high consequences would undeniably prove disastrous for your organization. Nonetheless, prioritize the latter while developing mitigation strategies.
Step 3 – Development of Mitigation Strategies
The third step is critical, as in this step, you’ll have to develop mitigation strategies for each risk. The nature and scope of the process will depend upon the severity of the risk. Design the mitigation strategy in a way that neutralizes or minimizes the impact of the risk. However, a risk analysis should inform the development of these strategies.
The first step is identifying a risk threshold where the organization determines when the risk has become imminent and requires action. Secondly, assess the cost of the risk or the financial damage that will arise in case of risk occurrence. Subsequently, develop mitigation strategies and analyze their propensity to manage the risk. Now, select the most effective mitigation strategy for each risk based on this analysis. Lastly, decide on a relevant person to monitor and manage each risk. As a result, they’ll be accountable for anticipating and managing the risk daily by listing activities aimed at risk management.
Step 4 – Devise a Monitoring Plan
A monitoring plan is developed for controlling and tracking risks. The monitoring plan focuses on overlooking the activities designed in the earlier step. Tracking lets you check whether the operations align with the protocols crucial to managing a particular risk. This level of monitoring is critical specifically for those risks that have a high likelihood of occurrence.
Under the monitoring plan, the authoritative figure develops templates and formats to track risk and mitigation activities. These templates and forms can contain the daily, weekly, monthly, or annual observations for risks alongside the name of the responsible person for managing them.
The monitoring and compliance personnel should prepare these monitoring reports and present them to the senior management. The following discussion amongst the team can identify how the risk management process is going and whether it deviates from the plans developed.
Whether small-scale, large, or newly established, businesses of all sizes should develop a workable risk management strategy. Since risks are an inevitable component of running your organization, having a risk management plan in place can help overcome unforeseen events. While the top management encourages mid-level managers to take risks while executing new projects, developing a strategy to tackle them is indispensable.
Organizations that avoid devising a risk management strategy often find it difficult to bear the brunt of market fluctuations. Therefore, it’s only viable to identify all the risks, assess your risk appetite, develop mitigation strategies, and ensure thorough monitoring. Eventually, your organization will efficiently overcome challenges and threats than the competitors.