7 Benefits of Risk Management: Ultimate Guide

In business, as in life, we face risks every day. While no one can predict the future, it is possible to determine and assess potential risks in order to mitigate, accept, avoid, or transfer the risk, especially in regards to a business. 

The benefits of risk management are plenty, and we’re going to use the space in this article to explore what they are. 

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What is Risk Management?

Risk management is a systematic approach to identify, assess, and plan for how to deal with risks or threats that can impact your organization. This includes financial, strategic, security, and legal risks, amongst others. 

For every company, financial risk is inevitable- whether it is due to market uncertainty, compliance risk with changing regulations, fraud, security risks due to data breaches, etc. 

With financial automation software, businesses can immediately lower certain risks by removing manual errors, improving processes, and maintaining better control of their data, to name a few upsides. 

We’ll touch on this more as we expand on the types of risks and benefits of risk management in business. 

What Causes Risk in Business?

Every business faces strategic risks inherently, which are driven by:

1. Growth: If your business is growing at a rapid pace, knowledge or skills gaps can threaten your success. 

2. Culture: Internal competition or resistance on behalf of employees can affect the overall business culture. 

3. Information Management: Last but not least, without centralized access to assess how the business is faring with data-backed information, performance gaps can challenge leadership. 

What are the Types of Business Risk?

There are also different types of business risk, including: 

1. Operations Risk: These are threats caused by failed processes or systems that are not working at an optimal level. 

2. Competitive Risk: While competition is generally welcome to push forward innovation, it can become tricky if the competition is stifling your business’ ability to achieve its own goals. 

3. Reputational Risk: When a company undergoes a scandal or issue, it may lose its relevance and trust amongst its customers or employees. 

4. Regulatory Risk: Changing and new legislation calls for companies to stay on top of adhering to standards. Otherwise, they will face regulatory risk, which is financially costly and also affects reputational risk. 

What are the Benefits of Risk Management?

If you had less to worry about and felt more prepared, can you imagine how your mindset and activities would shift during your day-to-day in business? The benefits of risk management are far-reaching. 

Let’s take a look at the various outcomes you can glean from practicing proper risk management: 

1. Better Decision-Making

It’s impossible to manage what isn’t measured. While it’s challenging to plan for the unknown, there are tools and software that can aid in predicting and forecasting potential outcomes before they happen. 

By leveraging a proactive outlook and carefully considering different scenarios, you’re able to have a better grasp on potential risks that your business can face. When you have an understanding and clear outlook, you can decide how to proceed to align actions with business goals. 

In doing so, you develop and foster a culture that is not afraid of risks, as well as one that operates with both agility and resilience. 

2. Improved Confidence 

Stakeholders are betting on your business, so you don’t want to let them down. With a strong risk management strategy, you’re displaying your level of care and intention to stakeholders, which breeds confidence. 

3. Optimal Resource Allocation

By understanding risks, leaders and management teams can properly allocate resources to best deal with future outcomes. This includes financial resources, as well as how to assign responsibilities to different people within your team in order to best execute and manage the chosen plan of action.  

4. Enhanced Performance

When your business faces fewer financial threats and detrimental issues, it is more likely to perform at a higher level. You’ll witness better resource allocation, cost savings, fewer mistakes, and even a more desirable company reputation. Employees and customers will benefit. 

5. Fewer Losses

Mistakes and workplace misconduct place a heavy financial burden on a business. With improved internal control, such as what you gain with the use of finance automation software, you can reduce errors by 90%. 

6. More Innovation/Growth

Risk management can be a catalyst for innovation and growth. Its success depends on how creative and how much you can plan in advance to deal with certain challenges. Take a look at Adidas, which faced a hard-hitting reputational risk due to its brand ambassador, Kanye West. 

Now, it’s experiencing a massive comeback due to its CEO’s lead to be less defensive and return back to its roots as a sports-based brand, rather than a lifestyle company.

What is the Risk Management Process?

The risk management process follows four critical steps, namely:

1. Identify Risks

Start by identifying the risks you wish to address. You can break down the risks into their different categories (market risk, financial risk, operational risk, strategic risk, technical risk, etc.) and make a record of them. 

2. Assess Risks

Now, it’s time to determine how likely each risk is to occur, as well as how much impact or damage the risk would have on your business. Here’s a guide on how to use a risk assessment matrix to prioritize risk. 

3. Address Risks

At this stage, you’ve decided how you will act upon each risk. There are four main options: acceptance, mitigation, avoidance, and transference. 

4. Monitor Outcomes

Lastly, track the progress of whatever you decided to do in step 3. Make sure that everyone is on board with the same plan and that the plan is producing your intended outcome. It’s recommended to keep records of what happened in the event you’ll need to refer back in the future.

Ready to learn how to build and implement your own risk management plan? Here’s how to do so:

1. Consultation: Like all good relationships and plans, communication is the starting point. Leaders should consult with their teams and convey the risk policies and procedures  to employees. 

2. Establishing the scope: How tolerant can the organization be to withstand risk? Here, you define the risk appetite. To decide the scope, it’s helpful to consider company culture, regulatory requirements, and business goals. 

3. Identify the risks: Identify and record potential risks that the organization may face. 

4. Risk analysis: Conduct analysis which determines the likelihood of a risk occurring, along with the potential impact. 

5. Risk evaluation: How do you want to deal with each risk? The four options are: avoidance (eliminate the risk by taking a different route), mitigation (limit the risk), transfer (contract with a third party such as insurance), or acceptance (should the risk fall into the acceptable threshold, bring it on).

6. Treat the risks: Apply the chosen option from the step above and carry out the planned procedures. 

7. Review & monitor: Take stock of what happened with your chosen plan of action- did the controls work as planned? Do you have to adjust your strategy moving forward? 

What are the Challenges of Risk Management?

The benefits of risk management don’t exist without hurdles (maybe). Some difficulties may include: 

1. Cultural pushback: Team members may be reluctant, but if they understand the value of risk management, it can help keep everyone’s goals aligned. 

2. Incomplete Data: Quality and availability of data is a must have when planning for effective risk management. With automation software, you can rest assured that you’ll have all your company’s data neatly centralized and ready-to-use for analysis or reference. 

What are the Best Practices for Risk Management?

While the intricacies of every organization’s risk management plan will vary, there are best practices worthwhile to consider and follow to successfully practice risk management. 

Remember these recommendations: 

• Keep the organization’s goals at the forefront of every decision 
• Be structured 
• Leverage information and data for decision-making 
• Include everyone in your organization who is involved 
• Monitor consistently and make adjustments as needed 
• Create value for the organization 
• Make use of technology and automation software wherever possible 

What are Examples of Risk Management Failings and Limitations?

There may be other incidents and circumstances that creep up that challenge your risk management plans to fall apart. However, by knowing what they are in advance, you can work to avoid the missteps that cause them. 

1. Lack of Governance

A small mistake can cause major damage, especially in highly regulated industries like finance. And, even if all people are in place and trained, mistakes happen that can be due to poor governance. That’s why it’s important to have reliable software, standard practices, and oversight in place to protect your business against mishaps and errors. 

2. Misjudgement

Sometimes, leaders become overly confident about their outlook and assessment of risks. If you place all your trust in the risk management process, but it isn’t backed by practice, then it can lead to downfall. It’s always important to exercise caution. 

3. Dismal Transparency

A lack of data or a lack of data sharing can lead to cloudy judgement and practices. The best risk management processes bode well when there is clear documentation, accessible data, and centralized management. 

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In many instances, automation software can provide these upsides by removing data silos, fostering collaboration, and protecting your company’s most sensitive information. 

Wrap Up

Although it’s impossible to truly know what risk will affect your business in advance, it is entirely possible to be prepared. After reviewing the many benefits of risk management, it’s up to you to put a process and plan in place. 

With the use of financial automation software, you’ll be able to minimize many common risks that businesses face, as the system can automate key processes like expense management, regulatory reporting, reconciliation, and more. 

With automation and centralized, connected data, stakeholders and business leaders can make more informed decisions based on real time data-backed insights, while employees can get more done without running the risk of costly, manual errors.