Risk management methods, Its Scope & benefits

When starting a new business or project, preparation for force majeure situations is necessary. Competent risk management methods will help you minimize losses and not miss out on profits even in a critical situation. Therefore, competent risk management in the financial sector is worth its weight in gold. What risks can you encounter in the business environment and what methods to “tame” them – let’s look at the material.

What risks exist in the life of an enterprise?

To manage risks, they are first identified and measured . For each organization, the set of threats inherent in it differs depending on the type of activity and the environment. It is necessary to identify them, analyze them, and then select appropriate methods to combat them.

Depending on the consequences, there are 2 groups of risks:

  • Clean ones lead to business losses.
  • Speculative – may lead to losses or additional financial profit.

The following threats are often encountered in the activities of an enterprise:

  • Production – failure to fulfill the production plan due to unfavorable internal or external circumstances; Personnel problems – arise when recruiting personnel that do not meet the organization’s goals, losing key employees, leading to information leakage, deterioration of reputation, and financial losses;
  • Commercial – possible losses during the purchase/sale of products;
  • Financial – failure of an organization to fulfill its financial obligations due to debts, inflation, changes in exchange rates or for any other reasons.
  • Investment – missed opportunities, reduction in dividend amounts, direct losses due to wrong decisions, falling market conditions, unreliable debtors.

This is just a short list of the dangers that threaten business. Each area of ​​business has its own specific ones. You need to know how to assess them and develop a response strategy.

General Risk Management Techniques

Risk management methods are targeted actions to reduce the degree of existing threats and possible losses. They only work when chosen correctly. According to the mechanism, all methods are divided into 4 large groups.

  1. Evasion: advantages and disadvantages of the method

From the name it is clear that the evasion method involves avoiding dangerous situations:

  • do not enter into transactions with partners with a dubious reputation;
  • refuse to cooperate with unverified organizations;
  • do not implement innovative projects if there is even the slightest possibility of failure.

This strategy may avoid many unforeseen dangers, but it will hinder the company’s development and cause many profitable investment decisions to be missed.

Insurance is one of the popular methods of evasion, when the responsibility for compensating losses is transferred to the insurance company. It allows you to resolve the issue of uncertainty and financial stability of the company. But this defense mechanism has its drawbacks:

  • it is impossible to insure against all threats;
  • insurance payments are made even if a dangerous situation never occurs;
  • The influence of insurance companies is limited, so they cannot provide complete protection against all threats.

2. Localization: under what conditions is it used?

The containment method is used only for threats that are easy to predict and can be isolated to some extent. Individual highly dangerous stages and areas of work are transferred to departments, where strict control is established over them. In practice, the following mechanisms are used:

  • A small subsidiary is created that takes over the development and implementation of innovative projects. Dangerous projects are isolated from the company’s core activities.
  • To implement a risky project, a deal is concluded between several companies. Its development is carried out by a specially formed separate team of specialists.

3. Dispersion (dissipation): a flexible control tool

Dissipation or dispersion involves the distribution of existing threats between business partners. At the same time, concerns, joint-stock companies, and other forms of cooperation are created.

A popular form of the dissipation method is diversification – reducing the concentration of hazards by expanding the product line, areas of activity, sales markets, and list of suppliers. If an enterprise suffers losses in any direction, it will be able to compensate for them at the expense of others.

Risk management is the key to a company’s financial stability A well-built risk management system at an enterprise will allow the enterprise to benefit from any threat and adequately cope with crisis situations.

A risk manager must be able to select appropriate hazard management methods and quickly make non-standard, but strategically-calibrated decisions.

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