Business Risk management is a subset of risk management used to evaluate the business risks involved if any changes occur in the business operations, systems and process. It identifies, prioritizes and addresses the risk to minimize penalties from unexpected incidents, by keeping them on track. It also enables an integrated response to multiple risks, and facilitates a more informed risk-based decision making capability.
Businesses today are unpredictable, volatile and seem to become more complex every day. By its very nature, it is filled with risk. Businesses have viewed risk as an evil that should be minimized or mitigated, whenever possible. However, risk assessment provides a mechanism for identifying which risks represent opportunities and which represent potential pitfalls. Risks can have negative impact, positive impact, or both. Risks with a negative impact can prevent value creation or erode existing value. Risks with positive impact may offset negative impacts or represent opportunities.
The risk management process involves:
- Identifying risks – Spotting the evolving risks by studying internal and external factors that impact the business objectives
- Analyzing risks – It includes the calibration and, if possible, creation of probability distributions of outcomes for each material risk.
- Responding to risk – After identifying and analyzing the potential risk, appropriate strategy needs to be incorporated. Either by establishing new processes or eliminating, depending on kind and severity of the risk.
- Monitoring risk and opportunities – Continually measuring the risks and opportunities of the business environment. Also keep a check on performance of management strategies.
Types of risks
- Hazard risk: A hazard is anything in the workplace that has the potential to harm people. Hazard risk includes factors which are not under the control of business environment, such as fallout of machinery or dangerous chemical, natural calamities.
- Financial risk: A large number of businesses take risk with their financial assets, quite regularly. Sometimes choosing a wrong supplier or distributor can backfire. Financial risk also includes risk in pricing, currency exchange and during liquidation of any asset. Business risk management should say how much risk is too much in financial relationship.
- Operational risk: Evaluation of risk loss resulting from internal process, system, people or due to any external factor through which a company operates.
- Strategic risks: Might arise from making poor or wrong business plans and losing the competition in the market. Failure to respond to changes in the business environment or inadequate capital allocation also represents strategic risk.
A risk assessment should begin and end with specific business objective that are anchored in key value drivers. Risk management acts like a guide in decision-making and planning to the company, in the event of an emergency. It helps to organize and allocate resources by setting up priorities. An effective risk management is
- Increasingly important to the success of any business today
- Required for a consistent approach, tailored to the organization
- Organizations that vigorously interpret the results of their risk assessment process set the foundation of an effective risk assessment program
However, BRM also has its own limitations, factors considering human involvement in decision making. Human judgment can sometimes be based on past experience or sheer gut feeling, which may or may not work at all times. Simple errors or mistakes can turn the business upside down. This could also happen when two or more people are involved and they fail to come to same understanding or accept a decision in confused state of mind/ haste. These limitations preclude a management from having absolute assurance towards the achievement of the entity’s objectives.