Risk Management – Concept, types and importance

We explain what risk management is, what are the various types of risk that exist and why it is so important.

Risk management
Risk management identifies possible risks in an organization in advance.

What is risk management?

Risk management is understood as the development of an approach focused on the identification and management of potential threats to an organization or a project, and then establish the ideal strategies for its launch. It is considered one of the central elements of strategic management.

When we speak of “threat” in this context, we mean any external factor that has the ability to disrupt internal processes of a community, organization or project, and that require some type of containment plan to avoid them or to minimize the damage they may cause, if they inevitably occur. For example, a community may be besieged by natural disasters or by the failure of human initiatives that tend to disorder, or by mixed processes that lead to an emergency.

Thus, there may be different types of risk:

  • Market risk. Linked to the fluctuations of the commercial and financial year, such as interest rates, exchange rates and the relationship between supply and demand.
  • Credit risk. When one of the parties to a financial contract may not comply with what was agreed and the money invested is lost.
  • Liquidity or financing risk. When one of the parties to a contract fails to raise enough money to honor the commitments made.
  • Operational risk. Or the possibility of suffering losses due to failures in the processes, personnel or technical systems employed by a company.

In this way, the purpose of risk management is none other than to identify in advance the possible risks in an organization, in order to take forecasts or even, in some cases, turn them into opportunities. Thus, business risk management (Enterprise Risk Management) aspires to design and apply to any business administration a set of strategies created to “shield” the company from its main risk agents, which involves first performing a weakness diagnosis, strengths and opportunities.

Importance of risk management

Risk management and risk management systems, with which it is sought to channel the threats of an organization or company, are fundamental instances in the contemporary business world, given that a high percentage of their success or failure is usually based on them. The reason is simple: an organization better prepared to face the possible complications that its particular production process implies, is also a company that will know what to do if a problem arises, thus being able to prevent it from becoming a catastrophe, when not managing to convert it. rather, it is an opportunity for growth and investment.

That is why risk management is understood as a process of continuous feedback, review, design of strategies, application of the same and then a new diagnosis.