Free Research Paper About Risk Management
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Entrepreneurship is characterized as "an independent, proactive, systematic economic activities, carried out by entrepreneurs running at their own risks to achieve economic and social benefits and profit. Entrepreneurship is inseparably linked with risks that are inherent to all areas of activity: production, marketing, finance etc.
Recently, the risk in business became even more dangerous due to sharpening the competition among enterprises. Under these conditions, small as well as big business needs involvement of risk management tools. It is well known, that successful management always applies risk management as a separate functional areas of business together with production, finance, human resources, etc.
Risk can be presented as financial category. Therefore, the extent and magnitude of the risk can be affected by the financial mechanism. Such effect is carried out using the techniques of financial management and a special strategy. Together, strategy and techniques form a kind of risk management mechanisms, i.e. risk management. Thus, risk management is a part of financial management. Basically, risk management is formed of focused search and organization of work to decrease the risk, the art of getting and increasing income (win, profit) in an uncertain economic situation. The ultimate goal of risk management is to obtain the greatest profit at the optimum acceptable ratio of profit and risk (Holmes, 2002).
In other words, risk is a potential threat of resource loss, loss of income or involvement of additional costs as well as the certain opportunity to achieve significant benefits as a result of business activities of the company under uncertainty conditions.
Risk management includes the following key steps:
The first step is to identify the risk together with the availability of its implementation and its impact on business with the scale of its effects;
The second step is the development of risk management strategy in order to reduce the probability of risk implementation and its negative impacts on business activities;
The third step involves choosing the appropriate methods and tools on ,managing the risk;
The final, fourth step, is exactly direct risk management – influencing the risk after its evaluation and adjustment.
The most important step of risk management is choosing the right tool to reduce and control the risk. The basic methods of risk management are risk rejection, risk assumption, risk transfer and risk assumption. Considering the risk management tools, which are much broader, they include different political, organizational, legal, economic, social tools, and risk management as a system allows the simultaneous use of several methods and tools of risk management in order to minimize the negative impacts more efficiently (Forbes, Smith & Horner).
Risk management is the process which should be developed at the very beginning of running a business at the same time with business strategy development. All the owners must be interested in correct development of understanding this notion since they must set the so-called risk appetite of the company, i.e. the maximum total risk which the company is ready to take. The notion of risk appetite is inextricably connected to the company’s strategy. Particularly, such stages of company’s development as joining new markets, production modernization and so on, must meet a higher level of risk appetite than the usual development stages, since they are such key strategic objectives as the preservation of sustainable financial position, preventing loss, support the positive image of the company. While developing the level of risk appetite there should also be reviewed according to increase in threats (due to changes in internal or external conditions).
Although risk management must be integrated with overall management process, it must stay advisable to service risk management organization and at the same time independent from other functional units, and be directly subordinate to senior management. The point is that all other functional units of the company are involved in the creation of surplus value; the task of the risk management is to ensure the stability of the process. The leaders of other departments are not directly concerned about this goal. The prerogatives of the risk management must be preparing decisions on business activities in relation to risks it faces, organization and information and methodological support of these processes and monitoring of their implementation.
The above mentioned explains why risk management focuses on loss. The fact is that the key objective of risk management is s just keeping the total expected loss within the prescribed limits. The modern risk management treats risks a as a shortfall in income compared with a particular risk-free option.
Risk management integration into overall management process is expresses particularly in the fact that risk management involves almost all divisions of the company. The risk experts are involved for identification and analyzing of the risks involving representatives of functional units. They are also monitoring the level of implementation of preventing measures on risks and disasters. At the same time of the risk management functions are coordination and control, and consolidation of information concerning risk events and development of necessary actions to respond them.
In fact, controlling over the risks is basically controlling over the total managing the organization as a whole, the entire processes of the company together with the internal control. Considering the fact that control is one of the components of the management process, the risk management together with other functional units implements the company’s organizational management.
Turning back to the risk management, it is not only about solely limiting the impacts of the risk source to reduce the possible losses. The internal as well as external risks can also be controlled. The typical examples are risk avoidance, risk insurance, hedging, and so on.
Prediction is also a good solution the risk management uses to effect the future changes in the financial condition of the company. Prediction is the forecasting of any event. It does not directly aim to implement the developed forecasts in practice. The key feature of predicting can be carried out considering the previous trends of the company as well as the evaluation of changes regarding future changes. These changes may occur unexpectedly. These predictions require from a manager correct understanding of market mechanisms and implementation flexible solution in case of emergency.
While development of strategy and tactics of risk management it is important to realize that not each type of risk can be quantitatively measured. Thus, the company can take a risk only within its equity. The potential negative consequences of risk should be taking into account in order to minimize future expenditures. Also, risking a large amount of capital is not acceptable in case if the expected results are too small. It makes simultaneous considering of other alternative solutions that may be less risky necessary.
Forbes, D., Smith, S., & Horner, M. (n.d.). Tools for selecting appropriate risk management techniques in the built environment. Construction Management and Economics, 1241-1250.
Holmes, A. (2002). Risk management. Oxford, U.K.: Capstone Pub.
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