Risk Management Process "The Basics"

Business owners faces risk every day. Most however never know what risks they face because they do not have a process to discover what may be lurking in the shadows that could really hurt them financially. This is what risk management is all about. By utilizing the risk management process and regularly applying this process to all phases of your business, you stand a better chance in reaching your goals and making profit. What is the process? It is a 5 step approach that includes, Identification, Analysis, Control, Financing, & Administration of risks. Like disease and illness, risk has to be diagnosed and treated before it gets bad and causes major problems. This is exactly what the risk management process does. It may be impossible to predict & diagnose all risks that a business owner might have to face, however it is possible to use the risk management process to deal with the majority of risks a business will face.

 

Enterprise Risk Management, 
the next generation

The discipline of Enterprise Risk Managment (ERM) is relatively new. By taking the risk management process and expanding its use to speculative business risks and to holistic views of business, the benefits of risk management has been increased significantly. The risk manager takes a full look at the business from top to bottom and inside out. For example, let's take a business that has a direct mail marketing plan that generates 90% of its income. Traditional risk managment may not deal with this segment of the business, but an ERM approach would. The risk manager will look at the local branch of the post office to make sure they are adequately staffed to get out the direct mail pieces. An ERM approach may also check into how many of the direct mail pieces are being returned and why.
As you can see ERM is taking the already affective risk management process and going to another level with it. The future of risk management is in ERM.

The 5 Steps to The Risk Management Process

1) Identification- there are four basic loss exposures that need to be identified in business. These are property, liability, personnel, and net income. Methods of identifying loss exposures are : risk assessment questionaires, loss histories, financial statements, flowcharts, organizational charts, & personal inspections are just some of the methods to identify risks in these areas.
2) Risk Analysis- In this step a risk manager analyzes the risks that have been identified. You look at frequency and severity of
risks. The max probable loss of risks, and also the timing of these risks. Finally in this step it is very important to make sure your data is credible and accurate. Without credile data the analysis step is useless.
3) Risk Control- This step of the risk management process is where the rubber meets the road so to speak. Here a risk manager has to decide to do the following with risks, avoid, prevent, reduce, separate, duplicate, or diversify. The deciding factor on which control mechanism is chosen will depend on the business entity and the financial strength of that business.
Risk Financing- There is a couple of ways to pay for risk. First you can transfer it to insurance. That is what happens when you buy an insurance policy. You can also transfer the risk by contract. You can retain the risk, but you have to make sure you have enough money to pay when the loss occurs.
Risk Administration- In this the final step of the risk management process, the risk manager has to make sure the steps are actively being taken to keep the process going. Also the risk manager may have to modify the risk plan based on what results are being seen or experienced.
As you can see there is a lot to the risk management process, but all businesses have to use this process to adequately manage their risks.