It is important to realize that risk management isn’t intended to be risk elimination. Discuss.
According to CIMA Official Terminology,2005. Risk management is a process of understanding and managing the risks that the entity is inevitably subject to in attempting to achieve its corporate objectives. For management purposes, risks are divided into categories such as operational, financial, legal compliance, information, and personnel. Risk assessment is the process of identifying hazards and risk factors and being able to analyze and evaluate them. Finding ways to control or eliminate the risk.
Risk can be classified in several ways Collier and Agyei-Ampomah (2006) note that
- Chance as a hazard or threat (downside risk) It is referred to as an adverse event or threat to the organization. Managing risk in this context means using management techniques to reduce the probability or impact of the adverse event without undue cost.
- Risk as uncertainty: it reflects in the CIMA Official Terminology definition where risk is the distribution of all possible outcomes, both positive and negative. Managing risk in this context means reducing the variance between expected and actual results.
- Risk is an opportunity (upside risk): risk is seen as a source of opportunity to business.
CIMA Official Terminology also classifies risk in several different ways as
- Business or operational means the activities carried out in an entity arising from the structure system like people, products, and processes.
- Country- when a transaction is conducted between countries, there are a few risks bound to arise like political, economic, and regulatory regulations. Environmental hazards may occur due to political, economical technological social-cultural, climatic factors, and legal issues.
- Financial risk the operations within an entity credit risk, currency risk, interest rate risk, liquidity risk.
- Reputational risk when the image of the entity is at risk of tarnishing.
- Strategic risk.
How all these risks are handled, depend entirely on the identification, analysis, and evaluation of the risk Actions taken on the risk are important because they determine whether the risk will be managed or the entity will suffer. Management risks in an organization, it is essential to identify what can go wrong in the object. Determine what kind of impact it will have on your body, a high or low impact depending on the exposure to the risk you have had. Risk evaluation should be conducted then have risk mitigation to know how to reduce the effects of unexpected events. Have a contingency plan an alternative plan on how to deal with risk. We cannot eliminate risks, but we can control them.