Risk Management: Definition, Benefits, Types and Steps

In a company, risk is definitely always there in every step or decision that is made. For this reason, risk management takes over an important role in minimizing or avoiding risk as much as possible.

It doesn't seem natural that the company doesn't face risks. Because, in building a business there are many challenges to be faced in order to develop in the long term.

Along the way, risks will always be present to test the company's business resilience. Moreover, if unwanted things happen that can cause the company's business to decline, such as the Covid-19 outbreak.

However, all existing risks can be managed properly through good risk management. So, what is risk management? What are the steps in implementing it?

In response to the questions above, let's look at the article below to understand the answers!

What is Risk Management?

For entrepreneurs or company leaders, risk management should be studied carefully to make their business grow rapidly.

Broadly speaking, risk management is a process for understanding, analyzing, and dealing with all forms of risk or uncertainty that occur within a company or organization.

Each company certainly has different challenges. That way, automatic risk handling is carried out differently too.

Then, what can be categorized as a risk? As previously explained, risk is synonymous with something full of uncertainty.

Uncertainty will usually end in loss, both for yourself and for the company or organization.

Regan: 2003 defines risk as a possibility that causes harm or harm.

All companies certainly do not want to experience such a big loss to their business. The reason is, the losses experienced continuously will have the potential to bankrupt the company.

One of the efforts to prevent this from happening is by applying risk management optimally.

The reason is, there will be a lot of uncertainty faced by the company. So, if you are a business owner, you should be prepared to manage risk carefully.

Benefits of Risk Management

Achieve business targets well

Every target set by the company at the beginning of the quarter must be met to the fullest so that the business can grow significantly.

However, to achieve a target is in fact not as easy as imagined. There are many obstacles faced, such as lack of human resources, budget, or other internal & external factors.

Therefore, the role of risk management is very important in order to optimally achieve business targets.

With good risk management, the company will easily achieve its targets because it is able to manage all the risks it faces.

Minimize the occurrence of bankruptcy

Bankruptcy is a word that is feared by all companies. There are many factors that make a company arrive at this phase, whether it's a lack of investors, being in debt, and so on.

Basically, companies can go bankrupt at any time and no one knows. However, all of that can be minimized properly if the company has optimal risk management.

The reason is, risk management helps your company to avoid things that are full of uncertainty. That way, the company is able to move well in every decision it makes.

Get job security

Risk management provides comfort and security for all employees, especially managers.

The reason is, he has good risk management skills so he can make the company's business run well.

As a result, all employees do not need to be affected by layoffs. Apart from that, risk management also helps you to improve your career well.

Types of Risk Management

Competition risk

Every business, of course, has a fairly tight competition. To handle this, you need to know the type of competitive risk management.

This type helps you to analyze and compare your business with competitors.

For example, you have a business in the field of traveling. Through competition risk management, you can find out who is the toughest competitor and learn what their strengths and weaknesses are.

Apart from that, you can also analyze the marketing methods that your competitors are using. That way, you can decide what kind of marketing strategy can beat competitors.

Geographic risk

This type refers to the risks associated with natural disasters, such as floods, fires or earthquakes.

If the geographical location of your company's office has the potential to be flooded, then you need to find ways to minimize the flood properly.

Uncertainty risk

Uncertainty often haunts the company's business. A concrete example is when the Covid-19 outbreak occurred throughout the world.

Therefore, uncertainty cannot be predicted carefully. One way to minimize the occurrence of losses is to carry out uncertainty risk management as much as possible.

Risk Management Steps

To implement risk management, you need to understand the steps below so that they are well organized

Identify company risks

Before everything is carried out carefully, the first step that must be done is to identify the company's risks.

As previously explained, each company has different risks. What do you think has the potential to make your company face risks and suffer losses?

There are many ways to find out, namely:

• Analyze the company's financial statements, namely the balance sheet and identify possible losses that may occur to the company
• Identify the entire process of the company's operations from input to output
• Inspect directly to the place where the company's activities are carried out, then identify possible risks that will occur and lead to losses for the company
• Evaluating the company's bad records in the past, such as the quality of production, service, as well as the company's operations and production processes
• Analyzing the environment around the company such as component suppliers, distributors, consumers, to competitors

Measure risk

To find out how much risk a company will face, you need to measure it first.

There are several methods you can use to measure risk, including:

Sensitivity method

This method is widely used by companies because this method is the easiest and most powerful in its calculations. In fact, most company managers use the sensitivity method to measure risk.

The components or variables that are usually used through this method are interest rate risk, exchange rate risk, market risk, credit risk and liquidity risk.

Volatility method

This method is a method to find out the results around the expected results. In its application it is usual to use the range and standard deviation.

Calculation of the standard deviation can be done using two types of data, namely historical data and forecasted data.

Risk control

In controlling risk, you need to understand how the risks are happening in the company and have the potential to be detrimental.

At least, there are two ways to make it easier for you, namely controlling risk and risk financing.

Risk control can be carried out by avoiding some of the risks that may occur to the company.

Then, risk financing can be identified by analyzing the company's finances

That's an explanation of the definition of risk management, benefits, types, and how to apply it in a company or organization.

It should be noted that risk management has an important role in the company's business development. So, you should start paying attention to it at the beginning of building a business so as to reduce the occurrence of early bankruptcy.