The future of an organization can be affected by my many things. The negative things are called risks while the positive ones are called opportunities. Risk Management is needed in any organization today than ever before. In the past, many organization were either not aware or ignored risks or worse all lived through the unfortunate consequences caused by them. In many cases, there were no designated persons charged with the responsibility of looking at or out for potential risks that could adversely impact the company. This unorthodox way of conducting business caused many companies to go bankrupt and some to permanently close down.
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Risk Management consists of eight interrelated components which define the manner in which a management team runs and organization:
a. Internal Environment. This is the tone and culture of an organization. It sets the line on how risk is viewed by the organization and the employees. Risk Management is the basis by which organizations develop their philosophy, integrity standards and ethical values.
b. Objective Setting. Risk Management process ensures that the organization's mission and position on risk is in alignment with its established objectives. This is despite the organization having its objectives in place prior to the implementation of a Risk Management plan.
c. Event Identification. Internal and external events that may affect a businesses ability to achieve its goals must be identified. These events are classified as either risks or opportunities. The opportunities may be incorporated into the organizations' goals and objectives.
d. Risk Assessment. The organization has to asses and evaluate risks on a regular basis to enable it analyze the type of impact each has on the entity.
e. Risk Response. The management team should select the appropriate action on risk events. Responses are based on an organization's risk appetite and tolerance.
f. Control Activities. The organization rules and regulations are put in place to ensure that risk responses are effectively implemented.
g. Information and Communication. Employees will perform their responsibilities effectively if relevant information is identified and communicated within a reasonable timeframe. The communication process should flow throughout the organizational structure.
i. Monitoring. The Risk Management system is monitored and modified when appropriate. Monitoring is achieved through management interventions, separate evaluations, or a combination of both.
Risk Management and Prevention
There are four main categories to consider in preventing or managing risk:
• Elimination — This involves avoiding any and all activity that could create a risk. A company may, therefore, choose not to operate in a certain geographical location due to historically unfavorable weather conditions.
• Limitation — This method reduces an actual exposure to a risk. A company decides to limit the likelihood losses by taking precautionary steps to reduce risks. For example a company that chooses to sell a limited percentage of its products online to limit its exposure. These products would be high selling items and ones most commonly sold online.
• Acceptance — This method entails accepting certain losses incurred. These are risks that cannot be insured against and is not cost effective to do because in the long run the expense to insure it will not cover the overall exposure. War is very common example.
• Transfer — This is transferring risk to another party at a cost.. The most common way of doing this is by...