As the risk environment continues to increase in complexity, it has never been more critical for risk managers to be strategic business partners. When enterprise risk management is aligned with business strategy, it can positively impact the organization’s revenue growth.
Amid the disruptive risk landscape, shifting consumer expectations, and economic downturn, being unprepared to handle business risks can spoil a business’s reputation and ultimately lead to decreasing profits. Some businesses even have to shut down if the risks and consequently the repercussions snowball out of proportion.
Viewing risk management through the lens of business, risk management needs to be embedded in strategy conservations at both the board level and in what every business function is doing.
Throughout this article, we’ll highlight the hallmarks of effective risk management and how risk management is instrumental in reducing losses and driving revenue.
Risk management is the term applied to the process of identifying, assessing, monitoring, and controlling the risks associated with an organization’s capital and earnings. Identifying the risky activities, functions, and processes enable the organization to plan for the potential dangers, minimize losses, and maximize revenue.
The most common sources from where risks arise are financial uncertainties, legal and technology issues, strategic decisions, accidents, and natural disasters. A successful enterprise risk management program covers the complete range of risks an enterprise is exposed to.
It is an integral part of good management and governance that includes sequential steps which aid in taking data-backed decisions.
The cost of non-compliance or poor risk management is high. It can lead to a leaky bucket that affects your bottom line negatively. At the same time, proper risk management can drive revenue and profitability.
Here are some strategic ways through which proper risk management improves profitability:
By preparing the organization for risk and action plans, it decreases damage and losses.
As risks are identified early on, it reduces unexpected costs like paying the staff overtime or buying expensive equipment to counter the risks.
As you are aware of the potential risks associated with strategic decisions, it helps the organization to set realistic expectations. You are able to manage customer expectations and build stakeholders’ confidence. This drives revenue and profitability in the long run.
Whenever there’s uncertainty around business strategy, compliance, business environment, health, and safety, the organizations are at potential business risk.
Here are five major types of potential business risks:
Financial risks are caused by multiple factors such as businesses undertaking financial decisions about suppliers and distributors, pricing changes, mergers, tax, credit, interest rates on business loans, or non-paying customers.
To counter financial or economic risks, companies generally adopt strategies to ease cash flows, diversify income streams and keep a check on loans.
These types of risks arise from factors such as the breakdown of equipment like computer systems, cyber security threats, mistakes made by the employees, supply chain, labor issues, and even natural disasters.
Risk management plans should consider ways to minimize losses arising from these situations. Many businesses have business continuity plans that tackle and even prevent such situations from happening.
Business environment and the economy change, leaders make inaccurate forecasts and take poor business decisions, there’s inadequate cash flow to maintain the continuity of business and many such factors account for strategic risks.
Moreover, technical innovations or a competitor posing a serious threat to the business are also strategic risks that every business is exposed to today.
Failure to address any business risks puts it at reputational risk. Apart from this, poor customer service experiences, negative publicity about your business as well as faulty products and services can put your business at a huge reputational risk. This affects the organization’s bottom line and tarnishes customer relationships.
Many times, security breaches, business fraud, or non-compliance with laws also damage your business reputation.
Many compliance and regulatory risks arise from new business rules and legislation, international trade, and privacy laws and they are constantly evolving as the legal landscape changes.
Additionally, cyber security risks arising from security breaches, lack of software testing, and beyond, for example, need updated cyber security regulatory strategies from time to time.
Risk management plans can help mitigate these and many other types of risks.
Companies can identify, minimize, and even eliminate risks by employing a comprehensive risk management framework that is essentially a template and guideline.
There are five components to consider when creating a risk management framework to identify the risks. These are risk identification, measurement and assessment, mitigation, risk reporting, and finally, risk governance.
Here are some ways to identify the risks beforehand and prevent or at least minimize their effects.
In many organizations, risk management is left to the top management and the frontline staff has no say in it. Ironically, the early signs of any risk triggers are observed in the front-office operations. So, organizations need to deal with the risks as they evolve and empower the front-office staff to raise the issue higher up in the corporate ladder.
Using integrated risk management software for managing enterprise risk is also beneficial as it takes a complete view of organizational risk and simplifies the risk management process. It helps businesses take data-backed decisions for mitigating risks.
Frequently, risk policies don’t align with business strategies which leads to unforeseeable risks. Enterprise risk management should be closely aligned with business strategies so that there is a consensus on how risk is defined, measured, controlled, and mitigated.
This is also helpful in reducing extra effort in risk management as it is streamlined with business strategies.
Rather than waiting for the right internal signals for risk, risk managers should look into external data sources for identifying signals that indicate potential risk areas. This is possible with new technologies that turn data into insights and intuitive dashboards. This points out the previously unseen business threats or opportunities.
Pinpointing specific risks and reducing the response time to eliminate them is possible with emerging technologies like machine learning and artificial intelligence. However, areas such as data, analytics, and modeling are yet to be fully used by the risk management teams. All these technologies help managers in tackling real threats to critical parts of the organization.
Any risk management program should consider the organizational goals and monitor the technology-related regulations. By doing so, you protect your business from uncertainty, ensure business continuity, reduce losses, and make way for higher revenues.
A robust enterprise risk management plan helps you identify, analyze, manage risks, and avoid potential threats.
The benefits of an effective risk management plan are:
It helps in better resource planning by considering previously unforeseeable costs. It can spot high-frequency events and work to minimize repetitive losses, paving way for increased revenue.
Risk arises as there is always uncertainty in predicting outcomes. As risk management identifies current and potential risks based on data, it helps in better project cost tracking and accurate return on investments. As a result, strategic decisions account for unexpected losses.
Detailed reputational risk management considerably reduces the effect of any reputational damage that may be caused due to unforeseen incidents. It offers more flexibility and less panic in case of challenging business situations, thereby maintaining customers’ and shareholders’ trust.
Risk management leads to more awareness about the business’s legal and compliance requirements as well as specific business risks like a power outage in a retail food outlet or a physical risk to your business property.
This helps in curbing unexpected events and consequently, wasteful expenditure.
Risk management stresses on businesses being prepared to meet risk eventualities and take the required course of action. This creates a mindset of safety and risk prevention among employees.
Once you have identified the real threats to a business, translating your risk management strategy into a concrete plan to counter those threats should be the next step.
In simple terms, Integrated Risk Management (IRM) is an all-encompassing approach to managing the different types of risks your organization faces. This includes strategic, financial, operational, security, and regulatory compliance risks.
Integrated risk management streamlines business-wide practices for improving the organization’s security, strategic decisions, and risk tolerance profile. As it focuses on risks and best practices at the business strategy level, the risk management process should collaborate with both the IT and the business leaders to perform the complete risk management framework. This includes doing a detailed risk assessment, creating a clear risk management framework strategy, planning for the risk response, and its monitoring.
These are tedious tasks and are prone to errors. That’s why the implementation of an integrated risk management software solution is much needed in any large enterprise to streamline your risk management process.
Here’s what VComply integrated risk management software can do for your business:
Creating a risk management strategy for organizational revenue growth cannot be delayed as the stakes are high. As existing risks become complex and new risks are always on the rise, organizations need integrated risk management software that handles enterprise risk management efficiently.
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