What Is Risk?
In a business, the risk is anything that threatens an organisation’s ability to generate profit at its target level.
“You can’t run a business without taking risks” – MILLARD DREXLER
“If you don’t invest in risk management, it doesn’t matter what business you are in, it is a risky business.” -GARY COHN
So, now you get something clear about how risk is important to an organisation, Nowadays, in this competitive world, there is risk everywhere, especially in business where the risk is like an uninvited friend. There is a thoughtful term in business “ MORE THE RISK, MORE THE PROFIT “ which means the business growth and profit is also based on the amount of risks intake by the organisation as well as how they are efficiently managed by the risk professionals.
What Is Enterprise Risk Management?
ERM or Enterprise Risk Management is the process of planning, organising, directing and controlling the activities of an organisation to minimise the negative impact of risks on the business which might be uncertain. In simpler terms, ERM is a way to effectively manage risk across the organization through the use of a common risk management framework.
Importance of Framework
In a business environment, the term ‘ framework ‘ means a system of rules that are used to govern a process or decision. So it is a crucial part of every business that needs to consider while building it.
An ERM framework provides structured guidance and feedback to an organisation in various sectors like business units, executive management and board members implementing and managing ERM programs. It helps an organisation manage complexity, visualize risks, assign ownership and define responsible for assessing and monitoring risk control.
Components Of ERM
Setting Of Objectives:
The organisation sets objectives which play a crucial role in determining the purpose of the business carrying on. It ensures that everyone is working towards the common goal for the welfare of the organisation.
These objectives act as a guidebook while you are forming your risk management plan, add-on to it, you must measure the following aspects.
Risk Tolerance: The utmost extent of risks that you can take to fulfil the company’s objective.
Risk Appetite: The level of risk you are willing to take to pursue your goals and objectives. Once you have defined these attributes, you can form a high-level risk management plan that caters to your strategies and goals
Identification Of Risks
Potential risks might be either certain or uncertain and have an impact on the enterprise and must be identified before it becomes a boom to the business of the company. Risk identification involves identifying risks from both internal and external sources that affect the objectives of the organisation.
Once the risk has been identified, they should be categorised according to the nature of the business for IT firms there will be cyber security risks etc. And finishing the categorisation it should be analysed to form a basis for determining how they should be managed effectively by the organisation. Analysing these risks is at the core of the risk mitigation strategy.
After risk identification and analysis, the next step is responding to the risk raised in the business. The response will vary according to the nature of the risk. If it is a small risk which does not have much impact on business, it can be avoided or accepted depending on the impact on the organisation. If it is expected to create a large impact then the necessary steps should be taken before it becomes a boon to the business.
We all know that information is wealth, our response to the risk should be based on the amount of information or data we have. Without adequate information, we cannot frame effective measures for the risk raised in the organisation.
The Risk Management process is not something we can apply whenever it is needed. It is a continuous process or work in progress. We need to monitor the activities of the organisation and the relevant data and information regularly to identify, analyse and respond to the risk at an early stage.
To a successful organization, it is important how the risks are efficiently managed in their organisation and for that they need an effective enterprise risk management framework. Following these components will pave the way for a risk-free organisation.
Blog author: Mohamed Aejas – Student Risk Committee Member, IRM India Affiliate