Risk evaluation allows you to determine the significance of risks to the business and decide to accept the specific risk or take action to prevent or minimise it. To evaluate risks, it is worthwhile ranking these risks once you have identified them.
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This can be done by considering the consequence and probability of each risk. Many businesses find that assessing consequence and probability as high, medium or low is adequate for their needs.
These can then be compared to your business plan - to determine which risks may affect your objectives - and evaluated in the light of legal requirements, costs and investor concerns. In some cases, the cost of mitigating a potential risk may be so high that doing nothing makes more business sense. There are some tools you can use to help evaluate risks.
You can plot on a risk map the significance and likelihood of the risk occurring. Each risk is rated on a scale of one to ten. If a risk is rated ten this means it is of major importance to the company. One is the least significant. The map allows you to visualise risks in relation to each other, gauge their extent and plan what type of controls should be implemented to mitigate the risks.
Prioritising risks, however you do this, allows you to direct time and money toward the most important risks. You can put systems and controls in place to deal with the consequences of an event. This could involve defining a decision process and escalation procedures that your company would follow if an event occurred.
Financial risk management - Wikipedia
Risk management involves putting processes, methods and tools in place to deal with the consequences of events you have identified as significant threats for your business. This could be something as simple as setting aside financial reserves to ease cash flow problems if they arise or ensuring effective computer backup and IT support procedures for dealing with a systems failure. Programs which deal with threats identified during risk assessment are often referred to as business continuity plans. These set out what you should do if a certain event happens, for example, if a fire destroys your office.
You can't avoid all risk, but business continuity plans can minimise the disruption to your business. Risk assessments will change as your business grows or as a result of internal or external changes. This means that the processes you have put in place to manage your business risks should be regularly reviewed. Such reviews will identify improvements to the processes and equally they can indicate when a process is no longer necessary.
For example, you may decide to accept a risk because the cost of eliminating it completely is too high. You might decide to transfer the risk, which is typically done with insurance. Or you may be able to reduce the risk by introducing new safety measures or eliminate it completely by changing the way you produce your product.
When you have evaluated and agreed on the actions and procedures to reduce the risk, these measures need to be put in place. Risk management is not a one-off exercise. Continuous monitoring and reviewing are crucial for the success of your risk management approach. Such monitoring ensures that risks have been correctly identified and assessed and appropriate controls put in place. It is also a way to learn from experience and make improvements to your risk management approach. All of this can be formalised in a risk management policy , setting out your business' approach to and appetite for risk and its approach to risk management.
Risk management will be even more effective if you clearly assign responsibility for it to chosen employees.
It is also a good idea to get commitment to risk management at the board level. Insurance will not reduce your business' risks but you can use it as a financial tool to protect against losses associated with some risks. This means that in the event of a loss you will have some financial compensation. This can be crucial for your business' survival in the event of, say, a fire which destroys a factory.
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Some costs are uninsurable, such as the damage to a company's reputation. On the other hand, in some areas insurance is mandatory. Insurance companies increasingly want evidence that risk is being managed. Before they will provide cover, they want evidence of the effective operation of processes in place to minimise the likelihood of a claim.
You can ask your insurance adviser for advice on appropriate processes. You can use a business interruption policy, for example, to insure against loss of profit and higher overheads resulting from, say, damaged machinery. Liability insurance - public and products liability insurance - is designed to pay any compensation and legal costs that arise from negligence or breach of duty.
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What is the risk management process?
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Risk analysts and risk managers, treasury analysts, regulators and finance professionals with risk-related roles.