Risk reduction is defined as a systematic decrease in the magnitude of exposure and the probability of its occurrence. The present economic climate, however, is forcing companies to take an increasing number of risks to thrive. Taking risks in one manner or another creates space for innovation and competition and having a clear picture of your business’s risks is a vital part of risk mitigation.
Here we list five approaches to assist you with the process of risk reduction:
1. Risk identification and evaluation
Risk is inherently entwined within a company. For a company to grow, it has to participate in opportunity, not avoid risk entirely. As opposed to preventing risk, companies should attempt to understand and establish the amount of risk, and then correctly participate in strategic planning and reduction to boost development and growth.
2. Development of risk management plans
After assessing the context of potential business risk, a company must start an investigation to identify the source of the risk. Choosing the perfect approaches and methods to identify and analyse risks will assist with the development and preparation of management policies and structures. A practical technique to identify and assess risk is ‘SWOT’. Internal variables (S-W) and external factors (O-T) are proven to assist the leadership team review the favourable and unfavourable changes that could influence operations and objective achievements of the company and project. A company can use operating leverage to link expenditures to revenue, and can structure their cost to increase when earnings are high (e.g. using manual labour instead of automatic processes) and consequently, decrease when income is lower. Other plans include financial leverage, which means a company considers debt versus equity fund. This supply of cash flow, where a company uses derivative securities to change the distribution of the cash flow, then, re-addressing their accounting practices will ensure relatively stable earnings. Once the risks are identified, you can proceed to the next step.
3. Implementation of control actions
Internal control activities cover policies and processes that match each business individually. The perfect application of internal control might assist a company in mitigating or at least decreasing, the effect of a hazard. Control activities (manual and automated ) ought to be developed by the leadership group and must be cost-effective. It’s essential not to forget that the expense of implementation should not exceed the price if the controller fails. The leadership team should capture this information and generate a reporting structure in such a way that employees can perform their duties without distraction and make sure that it matches any given activity or activity. This is accomplished by internal auditing, and it’s essential to remember that the risk assessment process should be a continuous evolution.
4. Respond to the dangers
When a risk is identified, the business must implement the management strategies which were prepared. The leadership team should determine whether the risk is negative or positive. Is it something that could be exploited for the improvement of this project, or should measures be put in place to avoid the hazard entirely?
5. Tracking of risk management functionality
The company leadership team must participate in monitoring the amount of danger regularly. For constant growth and after that, organisations should expand the management procedure farther to the measure of reviewing and post-process evaluation.
To sum it up, you won’t necessarily have sufficient information or the tools to handle every risk. A good risk management program will enable you to change your strategy if it’s not working, or if the unexpected risk occurs.