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Risk management

In every business, in every activity by which companies strive to achieve the set goals, there are always both risks and opportunities. The essence of the risk management approach is to evaluate your goals and plans to achieve them in order to understand your risks and opportunities, which can be noticed in time.

For successful risk management:

  1. there must be clear achievable goals and operational context or internal and external conditions under which the company anticipates the expected results; ​

  2. teams need to be set up to represent best practice in key areas and levels of action - strategic plans, key planned changes and key existing business plans. One or two people's views on risk will certainly be too subjective and the company should not rely on it. It would be optimal for most of the evaluated activities to be based on the opinion of 4 to 6 experts;

  3. In order to understand the significance of the risk and plan specific actions to reduce it, the risks must be described in a clear and precise manner, indicating both the cause or source, changes in possible future events or circumstances, and the impact on the objective to be achieved.

Risk management is a risk management process, the main steps of which are risk identification, analysis and assessment, as well as appropriate response.

The identification of risks usually looks at all possible sources of risk and their relationship to foreseeable events and their impact on the company's objectives. Sources of risk can be divided into two major groups - internal and external.

Internal sources of risk, in turn, can be further subdivided into operational (stakeholder activity; fraud; theft; adequacy of resources; adequacy of processes and systems), financial (insufficient customer payments for delivered products; company's inability to meet its payment obligations; suppliers' inability to meet their obligations). and technological (insufficient investment leading to loss of competitiveness; insufficient technology management, especially in the field of IT; insufficient production flexibility).

External sources of risk - economic (inflation; falling demand), social (level of education; language barriers; demography), environment (environmental pollution; natural disasters and disasters; strengthening regulatory restrictions), legislation (regulatory violations; penalties; litigation), political (corruption; rising taxes; currency devaluation; campaigns against foreign goods; tariffs; quotas), markets (cultural differences; new technologies; demography; competition; transport infrastructure).

The risks identified in the next step are analyzed to understand their significance. Analyzes both the probability of risk and the magnitude of the impact on the company's business objective. Wherever possible, the magnitude of the impact should be described in terms of the amount of money gained or lost. If the magnitude of the effect, such as reputational damage, is difficult to express in monetary terms, it shall be described and equated to the amount of the loss within certain limits. Probability analysis is based on both the experience of the company and the risk assessment team, as well as on modeling future situations.

When assigning value to risk, all risk mitigation control measures implemented in the company are also taken into account. Risk values are unique for each company, for example, a drop in demand may create an opportunity for the strongest companies in the industry to take over the customers of the weakest companies that have not passed the competition, and the weaker ones may take the threat of insolvency.

Once the value at risk has been determined, this value is compared to the risk appetite set by the company, or the amount of risk that the company is willing to take. This size is unique to each company and should be less than the company's ability to survive the risk event, or risk capacity, which is often equated with equity or the ability to raise capital. There may also be exceptions if the company is intentionally set up to operate in a high-risk environment, taking into account the possibility of losing all investments.

If the value of the risk is above the specified limit, the company must react accordingly. The most common action is the implementation of various internal controls and action plans. By strengthening the internal control system, it is possible to reduce the probability and impact of events caused by internal risk sources. The company is unlikely to be able to prevent events caused by external sources of risk, so it tries to better prepare for them with various action plans in order to reduce the negative impact or seize opportunities by reacting quickly. Unacceptably high risks can also lead to changes in the relevant business plans or even to the suspension or non-commencement of an activity.

Risks can be successfully managed if the company has an appropriate culture, which is well evidenced by open and objective internal communication on both problems and risks and a timely and thoughtful response to these situations. As a result, the main benefit of risk management in the company is better planning, more successful achievement of goals with the most appropriate resources.

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