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What is Risk Management?

Malcolm Tatum
Updated May 16, 2024
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Risk management is a logical process or approach that seeks to eliminate or at least minimize the level of risk associated with a business operation. Essentially, the process identifies any type of situation that could result in damage to any resource within the possession of the company, including personnel, then take steps to correct factors that are highly likely to result in that damage.

At the core of effective risk management strategies is the desire to find ways to manage the degree of uncertainty that exists within any business enterprise. The first step in the process has to do with evaluating the utilization of resources as they current stand. This step involves understanding the logical flow of the production process and how it relates to the successful manufacturing of goods and services for sale to consumers. Once there is a solid grasp of how the organization functions, it is then possible to move on to refining that process with an eye toward managing that uncertainty factor.

Once the business model is understood, it is possible to identify specific risks that are present throughout the production process, including the delivery of goods and services to buyers. As those risks are identified, they are analyzed for ways to alter the process so that the end result is still achieved, but the degree of risk is minimized or removed altogether.

For example, risk management as it relates to the production process may include action items such as reworking the maintenance schedule for machinery to ensure there is less opportunity for a breakdown or malfunction. Employees may be required to wear safety goggles, gloves, or earplugs in order to ensure safety and thus minimize the chances of injury through company negligence.

Risk management not only seeks to minimize the potential for injury to employees, but also reduce the opportunity for money and other forms of finance to be abused or utilized ineffectively. By making sure that all resources are utilized in a manner that is safe, logical, and efficient, the profit margin for the company will increase and everyone associated with the company is motivated to continue production.

The actual process of risk management will vary from company to company. The focus may be on employee safety measures, or machinery maintenance. In other companies, this process may demand revamping policies and procedures in order to rid the company environment of potential risk situations. It normally requires the support of owners and the management team in order to refine the overall operation and achieve the lowest degree of risk possible.

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Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
By comfyshoes — On Aug 31, 2010

Greenweaver- I think all companies try to minimize their risk potential. Many of these companies will perform seminars on sexual harassment, diversity in the workplace, and other areas that might lead to potential lawsuits for the company.

These seminars usually come from human resources and are part of the compliance risk management strategy of the company.

Sometimes those seminars involve safety measures in order to minimize workplace injuries that cost the company money and loss of productivity as a result of the workers compensation claims.

By GreenWeaver — On Aug 31, 2010

Cupcake15- Many banks also assess market risk management when providing business loan. For example, customers seeking a loan in order to open a restaurant are usually turned down because that type of business is viewed as riskier than normal.

Restaurants usually have a 95% failure rate, so unless the business plan is dynamite and the business is well- capitalized the bank more than likely will decline the loan due to their risk management methodology. Banks use risk management software in order to rate the credit risk of a potential borrower.

By cupcake15 — On Aug 31, 2010

Moldova-Risk management for banks also involves maintaining certain liquidity standards. Banks have to keep a certain amount of cash assets on hand and carefully invest in other assets to bring in additional income.

Many banks when practicing their investment risk management strategies, will often package and sell off loans to other investors. For example, Bank of America only keeps about twenty percent of loans that it writes. These are considered the “Cream of the crop” in terms of loans that provide little risk to the bank. These loans are from borrowers and have the highest credit ratings.

The remaining loans are sold off. You can tell if your loan was sold off if it is assigned to a different lender or finance company. This is another form of banking risk management.

By Moldova — On Aug 31, 2010

Sunny27- I have sat through some of those seminars.

I will add banking risk management involves many things. Financial management in the banking sector involves qualifying banking patrons for various loans.

The bank’s lending criteria is based on underwriting guidelines which is a form of credit risk management. The bank may assess the level of risk based on the customer’s credit profile.

The interest rates may be raised due to a higher risk loan. For example, home equity lines of credit often have lower interest rates because the line is set at a variableinterest rate and the borrower’s home is used as collateral for the loan.

The bank places a lien on the borrower’s home until the borrower pays off the credit line. The bank is lowering its risk with this product because the home equity line of credit unlike the home mortgage is a recourse loan, which means that the bank can seek payment from the borrower even though the borrower may have lost the home due to foreclosure.

In addition, these loans are pure profit for the bank because they are usually interest only loans that do not touch the principle unless the borrower makes extra payments.

By Sunny27 — On Jul 12, 2010

Great article- I just want to add that many companies offer OHSA training seminars to train its workforce regarding safety measures that need to take place in order to minimize potential risks.

The firm’s human resource department usually conducts these seminars.

Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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