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Why Risk Management Is Important

        posted by , April 04, 2013

Play the game for more than you can afford to loseā€¦ only then will you learn the game.
~ Winston Churchill
Risk management takes all the fun out of business.

At least that's how plenty of people feel. Risk is glorified as the heart of business. The brave business force that drives economic progress.

Risk is indeed necessary to business. It's impossible to grow and stay competitive without taking on risk.

The big myth about risk management is that it's about bringing risks down to zero. That risk management is about identifying and eliminating risks. It's not true.

Risk management isn't about stopping risk. It's about understanding, prioritizing and controlling risk. Any business that doesn't understand and control risk is bound for asset destruction, compliance issues, scandal and financial collapse.

Risk management adds value in several important ways:

1. Risk Management Provides Risk Transparency

Imagine a firm that has no view of the risks that employees take with the firm's assets and reputation.

Risk management identifies risks and measures the impact and probability of risk. This is essential financial transparency that's arguably as important as revenue and cost reporting.

2. Risk Management Provides Accountability for Risk

Accountable stakeholders may choose to accept risk. Risk management provides accountability for risk-taking decisions.

3. Risk Management Reduces Risk

Risk management identifies strategies and implements plans for mitigating and transferring risks.

4. Risk Management Aligns Risk With Strategy

Risk management allows a firm to focus risk-taking on strategic objectives.

Typically, risks that are critical to your business strategy are accepted. Risks that can threaten your business strategy are eliminated. In this way, risk management helps a firm align risk to strategy.

5. Risk Management Prepares for Risk Events

Risk is the effect of uncertainty on objectives. Risk management identifies, assesses and controls potential events. When these events occur, you've planned for them.

6. Risk Management Monitors Risk

Risk management monitors and handles risk events. This allows for prompt risk response.

7. Risk Management Supports Sustainability

Sustainability is the capacity to endure. Risk can threaten the survival of your firm. It can even threaten the survival of an entire system (e.g. global economy, planet's ecosystem).

Risk management isn't optional for any firm or system that hopes to sustain itself.

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