What is risk management?

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

  1. What is risk management?

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

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

Thus, there may be various types of risk:

  • Market risk. Linked to fluctuations in 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 the agreement 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 used 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, enterprise risk management (Enterprise Risk Management) aims to design and apply to any business administration a set of strategies created to “shield” the company from its main risk agents, which first involves making a diagnosis of weaknesses, Strengths and opportunities.

  1. Importance of risk management

Risk management and risk management systems, which are intended to channel the threats of an organization or company, are fundamental instances in the contemporary business world , since they usually have a high percentage of their success or their failure. The reason is simple: an organization that is 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 preventing it from becoming a catastrophe, when it fails to convert it. rather, an opportunity for growth and investment .

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

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