Enterprise Risk Management: Objectives, Benefits, and How to Create a Management Plan
Managing a business involves facing multiple types of risks that can have negative, positive, or both effects. Some risks have the potential to destroy a business or cause significant damage that requires time and resources to repair. However, some risks can also present valuable opportunities.
Frequently, businesses approach risk management with a compliance perspective, focusing on adhering to regulations and norms that employees must comply with. This approach is restrictive, as risk management based solely on compliance does not reduce the likelihood or impact of a disaster.
Moreover, it can reduce the organization's ability to capitalize on business opportunities that involve certain risks.
In this article, we provide a comprehensive view of risk management. We identify the types of risks that can threaten your business, the objectives of risk management, its benefits, and we give you the steps to develop an effective plan for your company.
Enterprise Risk Management: What Is It, and Why Is It Important?
Enterprise risk management is responsible for assessing, prioritizing, and managing the risks associated with your company's systems, processes, and operations. It functions as a framework for decision-making and strategic planning, both in emergency situations and in identifying potential opportunities.
Why is it important?
It is important because it allows you to know in advance the events that could harm your company. Thus, you can take actions to maintain an active presence in the market and, therefore, reduce the possibility of facing a situation of insolvency.
A business that identifies and effectively manages risks is in a better position to minimize errors, especially during the decision-making process. This results in a noticeable improvement in the quality and efficiency of the strategies implemented.
In summary, enterprise risk management encompasses strategies for the prevention and management of incidents with high destructive potential. Its purpose is to ensure the continuity, performance, and profitability of the business.
Common Risks Your Business May Face
According to the Harvard Business Review, there are three types of risk a business can face:
- Avoidable Risks (internal to the organization).
- Strategic Risks (those intentionally assumed to gain greater profits).
- External Risks (which occur outside the company and are beyond its direct control).
Additionally, it is important to consider the following specific examples when evaluating enterprise risk management:
- Physical and environmental risks: these can be fires or explosions that damage the company's facilities, as well as natural disasters; wildfires, severe storms, floods, hurricanes, tornadoes, etc.
- Human risks: issues associated with personnel that can affect the operation of the company, such as fraud, embezzlement, or malpractice.
- Threats: include any element in the workplace with the potential to harm people and that is not under the direct control of the business environment, such as machinery accidents.
- Technological and operational risks: include situations that compromise the company's operations, such as cyberattacks or critical system failures.
- Strategic risks: these arise from not responding adequately to changes in the business environment, often due to poor or erroneous business planning. As a result, you may lose a competitive advantage (for example, the case of Blockbuster vs. Netflix).
- Financial risks: encompass the risks associated with financial assets, including price fluctuations, variations in exchange rates, or the sale of an asset. They also include risks related to customers and partners, such as commercial risk when selling on credit.
Implementing effective enterprise risk management requires the participation of the entire company. Thus, you ensure that all levels are committed and prepared to handle and mitigate potential risks.
Objectives of Risk Management in a Business
Risk management is fundamental for businesses and presents a series of key objectives to provide efficient guidance. Here, we talk about the 5 key objectives:
1. Prevent threats
By knowing the risks that can affect the success of the organization, you as a business owner can implement preventive measures to minimize their occurrence. This way, you will reduce the costs associated with their consequences and protect the business from possible decline.
2. Respond to critical situations
Identifying critical points allows you to establish effective and rapid action resources and measures in the face of adverse events. The ability to respond quickly is directly linked to managing the costs derived from necessary corrections. This is achieved through:
- Prioritization of the business's strategic planning.
- Estimation of an adequate budget.
- Creation of an emergency reserve that allows covering unforeseen expenses.
3. Define risk levels according to the characteristics of your company
The risks faced by a small or medium-sized business are not the same as those of a large corporation. Acceptable levels of risk depend on the characteristics and financial structure of each organization. To determine these levels correctly, it is crucial to thoroughly understand the organization and understand its capacity to handle certain situations, especially when we talk about avoidable and predictable risks.
4. Minimize losses
If a risk materializes, the company may face significant losses. Therefore, it is essential to identify, in detail, potentially problematic events and their possible current and future effects on the business. Often, small problems that seem insignificant can accumulate and cause major inconveniences or declines in the quality of business operations.
5. Maximize opportunities
The main purpose of risk management is not only to avoid dangers, but also to make room for more effective decisions that maximize opportunities. Recognizing risks and defining contingency actions allows for more informed decision-making and is oriented towards taking advantage of the opportunities that arise. Knowing the effects and consequences of an action makes it easier to evaluate its advantages and disadvantages, allowing you to decide whether to proceed with a specific strategy or not.
These objectives show how effective risk management not only protects the company but also enhances its growth and stability in the market.
Benefits of Having Good Risk Management in Your Business
Knowing the main objectives of enterprise risk management, you may already deduce some of its benefits. However, we want to talk about the three most important ones for a company:
1. Prevents the company from interrupting its operations
Minimizing risks helps prevent situations that could disrupt the normal flow of activities in various departments of the company. For example, if it is identified that a manual process in the financial area is reducing productivity, digitalization can be promoted. Thus, tools can be implemented that facilitate and optimize the daily routine of staff to make it more efficient.
2. Reduces the likelihood of fraud
By identifying vulnerabilities in the business's digital environment, corrections can be implemented before hackers find and exploit these security breaches. This proactivity not only protects the company's sensitive information but also safeguards the trust of customers. Therefore, it is one of the most sought-after benefits today by companies that operate in the digital environment.
3. Encourages an innovative environment
Recognizing critical points is not only crucial for prevention. It also encourages innovation by adopting novel and preventive solutions tailored to the business needs and current market trends.
With prior knowledge of the risks, it is possible to develop strategies that are not only different and effective but also modern. In this way, it is possible to improve the quality of business processes.
This advance is viable, especially when advanced technology is available that provides precise data and stays up-to-date with emerging risks and technological innovations to mitigate them.
Steps to Create a Risk Management Plan for Your Business
The first thing is to understand the types of risks your company faces. Then, you should know how these relate to the key components of your business strategy.
It is crucial to perform a comprehensive analysis of the activities and specific components of your business. Consider what events, both internal and external, could hinder or impact each of these elements. Evaluate if you have systems and processes established to handle these risks and determine the likelihood of their occurrence.
Here, we detail the steps you should follow to create an enterprise risk management plan:
1. Risk identification. Begin by studying the internal and external factors that can impact your goals. This includes everything from operational failures to changes in the global market.
2. Risk analysis. Calibrate and calculate the potential impacts and probabilities of each identified risk. This analysis will help prioritize risks according to their potential for damage.
3. Risk response. Adopt appropriate strategies to mitigate risks. This may include implementing new processes or modifying or eliminating existing ones.
4. Monitoring risks and opportunities. Implement a system to continuously measure and document risks and opportunities in your industry. This should include monitoring financial risks and evaluating the effectiveness of your risk management protocols.
Ensure that your enterprise risk management plan clearly includes assigned responsibilities.
Also, consider the possibility of forming a risk management committee, with members assigned specific tasks. This is a way to ensure a coordinated and effective approach to risk management across the organization.
Conclusion
Enterprise risk management is a comprehensive set of practices and strategies that are crucial for the success of any business. This approach focuses on preventing situations that could be detrimental to your company's productivity and reputation. With good risk management, you can establish a clear action plan to face threats should they materialize.
At 360 Risk Solutions, we have risk management techniques designed to reduce exposure and improve the resilience of your business. To learn how we can help you, we invite you to get in touch with us.
