In the financial world, risk management is the process of identification , interpretation and acceptance or mitigation of skepticism in investment decisions . Risk management is an essential element in managing your business. You have a fantastic plan for your business, so you want to protect it against risks. Risks are what keep us on certain pathways and help us avoid other less profitable ones. The only time a business owner tends to embark on a new venture is when the rewards outnumber the risks by a determined margin.
Risk management is always changing and becoming more substantial in today’s climate and in the future. You may have a small business or large, you may be performing a function or other special event. Whatever you are doing and wherever you are, risk is all around you.
CAUSES OF INEFFICIENT RISK MANAGEMENT
There are many mistakes that are made in risk management and it is essential for companies to be aware of them.
- Use of poor governance: Having effective governance gives rise to openness and commitment which allows risk management to function effectively . If an establishment lacks leadership, it will undermine the risk management capabilities . It is important to be disciplined when involved in risk taking , especially during times of rapid growth and favourable markets . There must be controls, checks and balances, and monitoring involved .
- Following the “herd mentality” : When a company has a lot of activities , especially in the areas of mortgage brokers , lenders , mortgage insurers , investment bankers , and institutional investors , it is much easier for a manager to ignore the risks . When one manager sees another manager ignoring risks, they might have the tendency to follow suit . In order to avoid this, everyone should be made aware of the company’s financial condition .
- Misunderstanding the “if you can’t measure it , you can’t manage it”:Mindset can be a blunder in the waiting . Many managers use this mindset as an excuse so that they do not have to fully understand or acknowledge the risks involved. Many managers
make decisions with lack of information . It is imperative for managers to see the whole picture before they make decisions. Executive management must create risk awareness throughout every aspect of the business.
- A huge over-sight in some companies is when they do not incorporate risk management with strategy setting and performance management. When forming a strategy, it is important to incorporate all the risks involved. If risks are left out, managers will be left with unrealistic strategic objectives.
- Another over-sight that can have a major effect on managing risks is not involving the board in a timely manner. If a problem arises, the board should be notified as soon as possible and not after the fact . It is very important to familiarize the board with the organizations risk profile.
There are many risks involved when running a business. Managers need to behave in a manner that will benefit their company and they need to understand the risks involved in the business and be able to approach them in a realistic manner.
No matter what business you are in, there is always some risk involved . Superior management needs to incorporate these risks into their business strategies. Every manager needs to know all risks involved and how to deal with them.