Steps to Successful Risk Management
Risk management is a tool to systematically and explicitly identify, evaluate, and better manage risks by addressing them proactively. Risk management is based on conducting risk analyses.
In risk management, risks are controlled by determining how to manage the likelihood of the risk occurring or its consequences for identified risks.
The company identifies risks, understands as much as possible the financial implications of the risks, and implements measures accordingly. By considering the possible risks of certain policies at an early stage, these can be prevented or any serious consequences can be mitigated.
A one-time risk analysis is not sufficient. Only when the risk analysis is regularly repeated and updated, and the resulting measures…
STEP 1: IDENTIFYING RISKS
Risk identification encompasses all strategic, operational, financial, and traditional (damage) risks. The connection with the goals of the organization and business units is essential.
STEP 2: ANALYZING AND ASSESSING RISKS
Mapping out the risks allows for their analysis. A financial manager cannot stop at merely identifying risks. It is important to determine which risks are the greatest. Not all risks deserve the same attention; start with the most important ones.
STEP 3: ANALYSIS OF CURRENT CONTROL MEASURES
Companies can distinguish themselves from their competition by managing their risks more efficiently. In this phase, it must be determined whether the risks are not overly controlled and whether there are blind spots.
STEP 4: DESIGNING AND IMPLEMENTING ACTION PLANS
After the control measures have been mapped out, the financial manager must make a choice. What happens to the remaining risks? For each risk, they must choose from the following four options:
- Avoid
- Reduce
- Transfer
- Accept
STEP 5: MEASURING, MONITORING, AND REPORTING
Risk management is a continuous process. It is important to measure whether the action plans are affecting the risk profile. Risk information can also be used for planning audits.
STEP 6: INTEGRATING RESULTS INTO DECISION-MAKING PROCESSES
The risk information can be used for the analysis of future decisions (through risk analyses from the past). For each new investment proposal or major project, the organization must consciously take the risks into account.
