What is the main goal of risk management?

Risk management is a technique of controlling and avoiding threats to business organisation. It involves determining, analyzing and mitigating harmful risk to an organisation’s capital and earnings. Risk management is a practice which is required and followed by every business irrelevant of their size and nature. It aims at recognizing the potential threats in advance and takes all necessary steps to avoid their adverse effects on business operations.

These risks and unfortunate events are faced by every business organisation and may harmfully affect its capital or even may lead to its permanent closure. Timely identification and prioritization of these risks are quite important which is all done by implementing risk management techniques.

Risk management is a continuous process and works throughout the life of the project towards monitoring all risk factors. It focuses on controlling all possible future events by analyzing various past information like the probability of occurrence, historical data, lessons learned etc. Risk management supports the organisation in the achievement of their goals by ensuring that all activities are running on their normal track. It develops a safe and secure work environment for all staff and customers and increases the stability of business operations. Objectives of Risk management are discussed in the following points:

Identifies and Evaluates Risk

Risk management identifies and analysis various risk associated with business. It identifies risk at early stages and takes all necessary steps to avoid their harmful effects. Information from past is analysed to recognise all possible future unfortunate events. Risk management properly evaluates risk originated in business and develops a proper understanding regarding its real causes. This all help in taking all measures in mitigating the effects of these risks.

Reduce and Eliminate Harmful Threats

Harmful risks and threat are part of every business organisation. They have negative effect on productivity and profitability of business. Risk management techniques helps in avoiding and reducing the effect of these threats to business. Risk manager formulates strategic plans for each department and monitors their performance from time to time.

These perform series of workshop in organisation to develop proper understanding regarding risk causes and how to overcome them among all employees. Managers guide them in avoiding the identified faults and reduces these harmful threats.

Supports Efficient use of Resources

Risk management aims at efficient utilisation of all resources. Fuller utilisation leads to better productivity and increased profits. Risk management techniques support strategic planning for better results. It sets plans for functioning of business and ensures that all activities are going on their planned track. Certain targets are set for each division within organisations and perform routine check-ups from time to time. If any deviations arise, it takes all possible steps.  

Better Communication of Risk within Organisation

Risk management develops better communication network between directors, managers and employees. It helps in spreading all information regarding risk easily around the organisation timely. All people are able to interact with each other effectively and discuss about core solution about these risk. This helps in better understanding of several threats and taking timely action against them. 

Reassures Stakeholders

Stakeholders are an important part of every business organisation. Business must aim at serving the interest of its stakeholders for their support. Risk management helps in increasing the confidence of stakeholders in business and assures them of non-occurrence of any unfortunate incident.

They feel safe by the implementation of risk management techniques that will timely control and avoid all harmful risk. This leads to better trust among business and its stakeholders.

Support Continuity of Organisation

Risk management has an efficient role in long term growth and survival of the business. Every business faces several risk and unfortunate events during its life cycle. These unfortunates, if not treated timely, will affect the organisation capital and profit or even leads to its termination.

It avoids all these risks by monitoring continuously the operations throughout the life of the project. It reduces anxiety by overcoming all fear of uncertainty and develops a safe working environment within the organisation. This increase the productivity and overall stability of business organisations.

Hey there! So good to have you back again. In this blog, we will answer the most frequently asked question, which is, what are the objectives of risk management? Before we deep dive, let us also understand what risk management is and how to build a successful career in the field of financial risk management. Let us quickly get started.

The concept of risk management is not new. It is a process that is carried out by organizations to identify, measure, monitor, and control risks faced by the organization. Business organizations face different types of risks, such as environmental risk, business risk, financial risk, political risk, and many more.

The most important objective for any business today is to enhance the safety of investors. The objective of risk management is to identify risk at an early stage and take the necessary steps or measures to mitigate its harmful effects. Historic information is analyzed to understand a trend and to foresee all future unfortunate events. The objectives are as follows:

1. Identify:
• The first and the most important objective is to identify various types of risks arising out of uncertainty.
• Risk management helps in evaluating the source of risk in business and developing a proper understanding of
  the causes.
• The Risk Manager is responsible for identifying areas where losses can take place and determining the best
  way to handle various risks.
• Risk Managers collect information from different sources to identify minor and major exposures to losses.
• One example is the misuse of the internet by employees using emails which can lead to the theft of
  confidential information.
2. Measure:
• The other objective is risk measurement. Once the above mentioned step is completed, the next step involves
  creating a system to measure the identified risks and quantify their potential impact.
• Let us understand through an example. The probability of floods or drought is completely dependent on the
  weather conditions, which have a direct impact on the crops.
• These important details will help farmers get an overview of the degree of risk involved with each variable
  along with the value that is at risk.
3. Monitor:
• The next risk management objective includes continuous monitoring once the first two steps are completed,
  which are the identification and measurement of risks.
• Let us continue with the above example. It is very difficult to accurately predict the weather,
  significantly for longer periods.
• Checking the weather forecast continuously is a form of risk monitoring. The farmer must also keep an eye on
  the market prices for the crops to monitor price risk.
4. Control:
• The objective of risk management is to control risks. When the potential risks are identified, measured,
  and monitored, then the final objective is to find out ways to deal with or control those risks.
• Every business must consider the size of the risk and compare it with the cost of controlling it. It helps
  in evaluating whether the risk is worth spending time and money on.
• Risks can be controlled through any of the four methods, which are transferring, treating, tolerating, and
  terminating.
5. Transfer:
• Did you know that risks can be transferred using contracts? Yes, this is possible through sales or insurance
  contracts.
• Continuing with the earlier example, one option could be an insurance policy for crops against adverse
  weather conditions.
• Another option is a sale contract which is usually suitable for high-value low probability risks.

Coming to the real-life events, when Russia invaded Ukraine in February 2022, companies that had close ties to Russia were unprepared. Many executives consider this event as a black swan event. Wondering what are black swan events? We have covered this topic in our previous blogs. For some, it is a grey rhino event. No matter how we classify it, the war in Ukraine is a high geopolitical risk that is still unpredictable.

Businesses face a lot of uncertainty which can lead to a possible collapse in confidence and an even higher risk of recession.

Expertise in risk management, data analytics, artificial intelligence, and other emerging technologies can help in mitigating the severe impacts of risk.

FRM course can help in building a successful career in the domain of Financial Risk Management. The FRM course covers all the aspects of risk management in depth. To know more about the FRM course in India and FRM course eligibility, feel free to contact our counsellors, who would be more than happy to assist you. All the best and happy learning.