For most corporations, it is a matter of course to operate extensive risk management. Medium-sized companies are lagging, but small companies, founders, and start-ups often have a mixed relationship on this topic. Risk management is somewhat neglected in this group of companies. What is essential in effective risk management? We have put together a step by step guide for you to deal with risks even in a small company successfully.
What is Risk Management?
The term risk describes the probability of occurrence of an adverse event that is associated with possible damage. To prevent such a situation or to cope with it in an affair, no company may forego its risk management tasks. Anyone who thinks about business risks and dangers and thinks about effective counter-strategies at an early stage – before such a case occurs – is already in the middle of classic risk management.
The quantitative assessment of the probability with which one of the identified risk types will develop into a serious threat also plays a major role. Risk management is divided into the sub-areas of identification of risks (risk analysis), risk assessment (risk assessment), risk management and risk control. The latter serves to continuously monitor whether the risk management system used in the company corresponds to the current requirements.
Risk management aims to identify potential risks at an early stage so that suitable countermeasures can be taken if necessary. In this way, the effects of negative developments can be mitigated, and the resulting damage can be minimized.
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Why is risk management so important today?
Dangers lurk everywhere: tough competition, the fast pace of our time, hardly predictable changes in the purchasing behaviour of target groups, liquidity bottlenecks, legal changes or employee fluctuation. If your employees run away from you, we have tips on how you can keep talent in your company.
The list of dangers is long and, therefore, far from complete. Only those who know their risks, evaluate, analyzes and make strategic adjustments can prepare for turbulence. Companies of all sizes and in all sectors should rely on sound risk management with which they sound out risks and opportunities.
Risk management in project management
Risk management now plays a vital role in numerous areas of everyday business life, especially in project management.
Here is primarily fulfils the goal of preventing or being able to avoid unplanned incidents.
With the help of effective risk management, you can ensure, among other things, that deadlines are adhered to, and projects are completed on time. However, it is also clear that even the most comprehensive and best risk management system cannot circumvent all “dangers” 100 per cent.
Anyone who coordinates or schedules incorrectly, for example, still runs the risk of shaking a project. In addition, external factors, such as the termination of an important employee, can also mean that new planning has to be made.
Risk management objectives
The goals that can be combined with the total area of risk management are highly varied and can occur on different levels. Companies that invest in risk management want to avoid or reduce risks with the help of the appropriate measures and want to make better use of their opportunities.
The risks that emerge in the various areas extend to different levels and thus include, among other things:
- Economic (regular customers cancel orders)
- Technical (malfunctions on specialized machines)
- Legal (unknowing violations of the law, claims for damages, etc.)
In addition, in extensive risk management, additional factors, such as external influences in the form of storms and co. Based on a comprehensive risk management system, damage should be better forecasted.
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What are the risks?
Companies are subject – depending on the industry and size of the company – to different risks that are related to various factors. For example, the number of staff can be just as much a risk as a short-term liquidity bottleneck. In addition to these internal risks, there are external risks over which the company has no influence (e.g. earthquakes, flood disasters). An excerpt of potential sources of danger illustrates their range:
Environmental risks: Environmental risks, in particular, were underestimated in the course of everyday business. Nevertheless, storms and their effects have the potential to shut down a business “overnight”. How important it is to correctly assess one’s situation is made clear above all by the risk management in the USA in the hurricane regions. In Germany, floods, among other things, represent a real danger for companies in the affected areas, depending on the company location.
Project Management Risks
- Strategic risks: unfavourable choice of location, wrong focus in portfolio
- Financial risks: liquidity shortages, exchange rate fluctuations, loan cancellations
- Operational risks: insufficient production capacities, machine failures
- Personnel risks: high employee turnover, recruitment problems due to a lack of skilled workers
- Regulatory risks: Changes in laws or standards, e.g. environmental protection
- IT risks: Viruses, Trojans, hacker attacks or server failures.
- Political risks: Changes in the political situation, e.g. embargo on exports to certain countries
6 levels of risk management
Level 1: No risk management
At this level, a company has insufficient risk awareness and is therefore not able to counteract the respective risks in the best possible way. Instead, dangers in everyday business life are often ignored.
Level 2: Damage Management
Here the entrepreneur is well aware of the existence of certain dangers. He takes measures to limit the respective risk and takes other factors into account, such as environmental protection. In some cases, the entrepreneur also takes out insurance with a view to particular risks. However, there is no unique risk tool at this level.
Level 3: Regulatory Risk Management
In level 3, the company concerned can fall back on a risk management system. The corresponding risks are continuously assessed and updated. The respective steps are also recorded in writing. In some cases, so-called risk management strategies are also developed—the goal: a simple risk aggregation.
Level 4: economic risk management
Here the risks are seen not only as dangers but also as opportunities. The corresponding system is based on comprehensive software, and the entrepreneurs can precisely assess the specific risks.
The real risk is also calculated. Individual risks also play a vital role in level 4. One of the goals is to ensure liquidity in connection with market fluctuations.
Level 5: value-based risk management
In value-based risk management, risk and planning are closely linked. It is also possible for the company to determine the corresponding value contribution. This usually makes it easier to plan further action even better. In the calculations, unique details, such as the equity requirement or the probability of default, also play an essential role.
Level 6: Embedded Risk Management
In level 6, the risk-adjusted income value or the risk-benefit is calculated. The individual result allows different decisions from the strategic or operational area to be made even more well-founded. Any uncertainties and the reactions of the competition can also be taken into account here.
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