Despite the impossibility for a company to foresee all the risks inherent in its project, the entrepreneur can detect some, the most frequent ones. Managing these risks requires the establishment of a strategic study. Before determining the stages of risk management, it is essential to determine its principles.
Risk Management Principles
Risks can be defined as a hazard that affects wealth and decisions. Risk management translates as a process for evaluating the benefits and costs of reducing risk and choosing the appropriate solutions. The decision must take into account the different circumstances surrounding the project. The risks inherent in the business exist in several forms:
Credit risk: the case of a debtor who risks not is being able to honor his commitments.
Interest rate risk: the case of a change in the price of a security (debt, compound security) or of a derivative product following a change in interest rate.
- Liquidity risk: risk linked to a sale or purchase transaction.
- Counterparty risk: the existence of a fault on the side of the seller or the buyer during a transaction.
- Operational risk: risk linked to the performance of activities within the company.
- Currency risk: risk linked to the variation of the exchange rate.
The Five Stages Of Risk Management
For excellent risk management, the implementation of a specific study is essential. Compliance with these few steps allows the company to manage risks so that they cannot constitute barriers for the company’s projects.
Identification consists of identifying all the parties exposed to the risk. To this end, the company must draw up a list containing all the potential risks. It must distinguish the most important risks on the one hand and the least important on the other. Using this list, she can analyze their correlation.
This step consists of evaluating the risks according to their seriousness, determining their potential impact and the extent of the related damages. Other than that, it measures the costs associated with the risks identified. To achieve this, data collection and statistical analyzes are required.
Definition Of Solutions
The entrepreneur has several possible solutions to find the most suitable. He can define the solution according to the high risk processing company himself by studying the possibility of eliminating or limiting its effects. He can take into account the characteristics of the project and apply some modifications to it in order to avoid the risks.
Implementation Of Solutions
After determining the most suitable solution, it must be implemented. It is important to define the cost of implementing the solution according to the means available to the company. The associated costs must be reduced; otherwise, they could generate additional expenses for the company.
Risk management requires regular monitoring. This monitoring aims to guarantee the reliability of each step. This makes it possible to set up solutions in the medium and long term.