Finance / Insurance / Investment

5 Steps of Risk Management Process

by Tabassum Nusrat Soti

Every organization must deal with risks, some chosen consciously and others an inherent part of the business’s environment. Starting a business, putting products on the market, hiring people, collecting data, and developing systems are necessary to grow a successful business. They also include all risk factors. To mitigate business risks, managers follow a process commonly known as 5 steps of risk management process.

It is essential to distinguish that risk management is not a one-time job. It is a procedure that takes place all across the existence of a company as it attempts to anticipate threats and deal with them comprehensively before they cause a negative impact. This is a broad topic because risks can manifest themselves in various ways, along with risks to initiatives, finances, privacy and security, and the surroundings.

What Is the Risk Management Process?

In a company or organization, risk management is characterized as identifying, able to monitor, and addressing potential risks to mitigate their negative effect on a company. Possible risks include security breaches, data loss, cyber threats, equipment failure, and natural catastrophes. A practical approach to risk management would then help identify which risks are the most dangerous to an entire organization and provide methods for dealing with them.

5 Steps of Risk Management Process

Identifying, analyzing, and responding to risk factors that arise during a business’s operations is what risk management entails. Proactive rather than reactive risk management entails exerting as much control as possible. As a result, effective risk management has the potential to reduce both the likelihood and impact of a risk. Risk management is important because it gives companies the tools to identify and manage conceivable risks. Once a risk has been specified, it is simple to mitigate it. Here, we will learn six steps of risk management process step by step with an example.

Step 01: Identify the Risk

The first phase in risk management is to identify all potential risks. Risks include market, environmental, and other factors. They are classified into hazards: accidents, fires, and environmental disasters. Competitive firms or negative viral constructive criticism are examples of strategic risks, as are financing decisions such as an economic crisis and potential losses such as supplier failure or employee retention. Identify and categorize as many risks as possible to expedite your risk management strategy using the five types listed above. Among the effective methods for identifying risks are:

  • Consultation with industry professionals
  • Performing audits with cutting-edge software
  • Utilize your team members’ experience by asking them to provide feedback on risks they have observed or experienced.
  • To have a group brainstorming session.

Step 02: Analyze the Risk

Following the identification of risks, the next step is to evaluate their likelihood and potential impact. Concerning issues, “How exposed is the company to a particular risk? Risks must be critically examined to be proficiently made a priority and controlled. Strategies for analysis include:

  • Qualitative analysis- it provides a detailed result and enables the relative positioning of risk issues. This is material for projects of any size.
  • Quantitative analysis – it gives a scientific depiction of risk and produces a numerical consequence (risk estimate). A quantitative appraisal is embraced to address issues that merit a thorough investigation.

Step 03: Evaluate the Risk

After the risk assessment/analysis is completed, a risk evaluation should occur. A risk evaluation compares estimated risks against the organization’s risk criteria. Risk criteria include associated costs and benefits, socio-economic factors, legal requirements, and system malfunctions. Next, categorize and prioritize each risk relying on its intensity.

This enables your organization’s total risk exposure to be seen and understood by the risk management team. For example, risks that cause minor inconveniences should be prioritized lower, while risks that cause catastrophic losses should be prioritized higher. It would help if you also determine your risk profile, risk appetite, and risk tolerance. Some organizations are okay with taking many risks, while others prefer to have no risk exposure at all.

Step 04: Treat the Risk

Proficiently treating and mitigating risk also entails efficiently using your team’s resources without derailing the project. Create a risk management strategy to remove or comprise each threat to the greatest extent possible. Starting with the highest-priority risk, you and your group should work to resolve (or at least reduce) the risk so that it no longer represents a risk to your organization. A good starting point is to contact the specialists in each field to which the risk pertains.

  • Avoid the risk: Stop risky activities.
  • Reduce the risk: work to reduce the possibility of an adverse event.
  • Share the risk: obtain insurance to protect the risk or enter into a contract with the other stakeholders to start sharing the methods to share the costs.
  • Accept the risk: recognize that if the risk takes place, the business organization must bear the repercussions and be primed and ready with a backup plan.

Step 05: Review and Monitor the Risk

Regularly monitor, track, and review your risk mitigation results to determine whether your initiatives are adequate or if changes are needed. If the risk management strategy implemented needs to be more practical, your team will have to start from scratch. Risks do not remain constant; instead, they change over time.

As the potential impact and probability of occurrence change, what was once considered a minor risk can become a significant threat to the business and its revenue. The procedure of “keeping an eye” on a situation by conducting regular risk assessments is known as risk monitoring. As a result, the organization must monitor risk management outcomes.

It has to be reported externally and internally to ensure that managers and senior executives are informed of progress toward risk objectives and changes that may impact the organization. Avoid impulsive reactions and get into “firefighting mode” to rectify problems.

Example Of the Risk Management Process

If Emanuel PLC is trying to get some risk management done. They found they might have some liquidity issues because clients’ due payments were not being cleared on time, and the borrowers asked for more money. This is how they do the risk management here-

  • Step 01: Identify the risk: First, Emanuel PLC identifies which risk they are the most exposed to. Is it operating risk or credit risk? This is definitely a credit risk because their liquid funds are becoming scarce, as the dues and lent money need to turn up in time.
  • Step 02: analyze the risk: now that they know it’s credit risk, they need to run quantitative and qualitative analyses. How much money shortage? From whom is the money due? Time, date, amount characteristics, etc. Everything about the risk will come out in this step.
  • Step 03: evaluate the risk now: They must categorize the risk and stakes. Here the liquidity issue and credit risk will meet the organization’s economic, social, and financial aspects. This will indicate how severe the risk is and possible ways to take action. In this case, to collect the dues effectively using legal and professional services.
  • Step 04: treat the risk: They will take action. The organization’s first responsibility here is to inform and notify the authorities they owe money from and agree with everyone. And take legal and professional service help to collect the dues as soon as possible without ruining any business relationships.
  • Step 05: Review and monitor the risk: The risk here occurred because of the lack of monitoring in the first place. So, Emanuel PLC is obligated to take pointers by reviewing this risk assessment, monitor the situation, and stop it from occurring again. They should have a committee of employees as a control panel and reviewers. They would overview the situation and control the pattern of the risk.

What Is the Correct Order for The Steps in The Risk Management Process?

The correct order of the risk management process is as follows-

  • Identify the risk.
  • Assess the risk (analyze and evaluate).
  • Treat the risk.
  • Monitor and Report on the risk.

Here the second step of assessing the risk refers to analyzing and evaluating. So, the core focus of it is to understand the risk and its outcomes. The researcher or the risk management authorities usually work with them together for better results. And the rest of the stages are in the right place. This is the ideal way to manage risks.

Should We Follow Risk Management in The Proper Order?

Managing risk has never been so important than now. Contemporary organizations’ risks have become more complex as globalization has accelerated. New risks regularly emerge, many of which are related to or generated by the now-ubiquitous use of digital technology. Global warming has been labeled a “risk multiplier” by risk analysts.

Other industries’ risk is more qualitative and thus more challenging to manage, necessitating a deliberate, thorough, and consistent approach to risk management. The process is advantageous because it uses all logical and numerical data to develop risk-reduction solutions. An organization must follow the procedure’s order. They obtain all pertinent insights and data to consider and develop an action plan.

For example, you can not do assessments and evaluations if the risk is identified correctly first. And if you skip the analysis part, the risk and its scope will be undetermined, and the lack of information will hurt the risk management process. Evaluation allows the analyzed data and information to link with the organization’s internal and external environmental factors and generates the most effective approach to managing risk. But if evaluation is done before risk analysis, that would allow the developed solution to have unretainable flaws for lack of proper information. So, the risk management team must always maintain the order of the risk management process for the best outcome.

Bottom Line

Admittedly, most businesses encounter additional risks. Examples include cyber warfare, security breaches, operations and maintenance instabilities, equipment malfunctions, political or financial crises, and environmental catastrophes. An efficient approach to risk management enables an organization to recognize and identify which risks pose the most severe threats and implement the most efficient risk-mitigation strategies to maintain those risks at acceptable standards. This risk management process consists of several steps or activities. Structures for risk management are designed to accomplish more than identify existing risks. A good risk management framework should also quantify and anticipate the effects of sources of uncertainty on a company or organization.

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