Every decision that you'll ever make
in life results in a trade-off. You balance the opportunity cost of
the decision with the gain that the decision will produce. You
balance the risk of that decision alongside its reward.
Risk permeates every decision that
humans make, especially in business. Every business that operates in
the world has different risks that could compromise its success.
Successful companies are those that are able to balance the right
amount of risk and implement risk management strategies that
mitigate potential loss.
In this article, we'll explain
what is risk management in simple terms.
What is Risk
In short, risk management is the
art and science of assessing the level of risk that is inherent
in a decision as well as strategies to reduce that risk, as well
as any potential losses should that risk be realized. Notice the
words art and science. Risk management is just as much of a
technical discipline as it is one that builds with experience
How Does Risk
There are several elements that go
into risk management. The first such element is assessing the
potential risks of a given business or investment decision.
For instance, let's say that a
company decides to expand into a new market. The risk is that
the market may not be ready for the company's entrance, or that
the company's product or service may be ignored by buyers in
favor of existing competitor products and services. The first
step in risk management is to collect a list of all the risks
that could happen.
The next step in risk management
is to assess the value of the potential risks shortlisted in the
first step. Continuing with the previous example, if the company
were to fail in the new market, what would be the cost to the
How much would the bottom line be
these dollar values are known can risk management become
The last step in risk management
is to evaluate the likelihood that the risk will be realized.
This can be done in a number of ways, but a common strategy is
to look at similar cases. For instance, the company could look
back at other markets that they have entered and look at failure
Risk can be mitigated in a number
of ways. For instance, by reducing the scale of the operations
in the new market, the company can reduce its potential downside
should the product or service fail in the new market. Another
way to mitigate risk is by purchasing
captive insurance, which pays out money in the event that
the risk of a business decision is realized.
How Will You Use
Now that you know what is risk
management, you can start implementing it in your business and
investment decisions. What kind of risk management strategies do
you plan to implement?
For more business advice, be sure
to check out the rest of the articles on the website!