Welcome to Administration.co.uk
Risk is an inevitable part of any business venture and there is always the possibility of making losses in any activity you undertake. However, risk can be reduced if not completely eliminated if business administrators anticipate it and then plan measures to tackle it. Risk management is a process of identifying, monitoring and limiting risks as far as possible.
The first step in risk management involves identifying the risk and assessing its impact.
Sometimes, you may need to manage the risks in the beginning of the project itself. For example, if you start a fire susceptible business, you should buy a fire insurance policy right at the outset.
Now let us for example, consider the case of a cargo ship that passes through the Gulf of Aden. The danger of the ship being attacked by pirates can not be ruled out. The management of the shipping company anticipates this risk and fits the ship with the state-of-the-art technology and other safety measures to eliminate or reduce it.
Once a risk is identified, the administrator then tries to assess it in terms of probability ratio over a scale. Accordingly, the risk may be low, medium, high or critical. If the probability is less than zero, there are no chances of its occurrence. A more than zero and less than 100 result points to a possibility of a risk.
Risk management involves the study of previous data and the present scenario to arrive at precautionary measures. Basically, you analyze data and study the steps that were taken to eliminate the risk. This is typically a case of learning from past experiences---you incorporate what was successful and avoid making mistakes that have already been made. Again this does not mean going by the book. If a strategy was successful in the past does not mean it would work today. The process of analyzing also takes into consideration the present case scenario and also anticipates what will happen in the future. This becomes all the more important in financial markets that can be really volatile.
So studying and analyzing historical data as also the current scenario help the business administrators to identify potential risks. They can also examine the sources of the risks and their possible impact. The risk management team can then prepare a list of normal risks that are associated with a particular project.
The final aspect of risk management involves the managing of the risk. The risk management team can follow any of the four strategies: avoiding the risk by changing the plan of action, transferring the risk to someone who can handle it more effectively, mitigating the impact of the risk, and accepting the risk because its impact is not likely to be significant.
Although risks are often associated with negative consequences and are avoided for that matter, there are those risks that can have a positive impact as well. This is precisely the reason that business managers take risks.