All enterprises in the implementation of their business processes are systematically faced with the need to manage several types of enterprise risks. Therefore, the top management of the company must ensure that the need for risk management is recognized by all managers and personnel in the organization as a factor of paramount importance.
Risk management is associated with both negative and beneficial consequences. The essence of risk management is to identify potential deviations from planned results and manage these deviations to improve prospects, reduce losses and improve the soundness of decisions. Managing risk means identifying prospects and opportunities for improvement and avoiding or reducing the likelihood of unwanted events.
Risk mitigation involves careful analysis of the conditions for making decisions. Risk management is a logical and systematic process that can be used to choose a way to further improve activities, increase the efficiency of the organization’s business processes. This is the path leading to assured performance in business processes. Risk management must be integrated into the daily work of the enterprise.
Risk management requires vision and defined procedure. It is more a process of identifying what might happen and at the same time ensuring a state of readiness for it, rather than reactive management of activities. A formalized risk management system allows you to create an organization management system that works to prevent potential problems.
What Businesses Need to Manage Risks Efficiently
Risk management requires a clear distribution of responsibility and authority required to make management decisions. Top management has overall responsibility for risk management in the organization. Its exclusive prerogative is the distribution of responsibility and authority among the relevant employees. Decisions made in the risk management process must be within the framework of legal requirements and meet corporate goals. Thus, it is particularly important to find the optimal balance between the responsibility for risk and the ability to control this risk.
Risk management depends on an effective communication process between risk management participants. The risk management process is carried out both in the internal and external environment of entrepreneurship, therefore it is necessary to interact with both internal and external participants in this process. To ensure effective risk management, it is first of all important to establish effective communication within the organization.
Risk management requires a balanced decision. In the process of risk management, it is necessary to clearly determine the economic feasibility of reducing the degree of risk and achieving the planned results.
The implementation of any type of entrepreneurial activity to one degree or another is associated with a certain level of risk.
From the point of view of the theory of enterprise risk management, the distinctive features of entrepreneurship, which should be considered when analyzing and assessing the consequences of risk, are:
- The organization’s target orientation to make a profit from its production activities.
- Differentiation by types of entrepreneurial activity.
- Responsibility for contractual obligations to customers.
- The need to make management decisions considering the consequences of risk.
The listed signs determine the inevitable implementation of the organization’s activities in internal and external conditions associated with the risk of reducing profits or incurring losses.
The direction and content of the noted signs of entrepreneurship give rise to the following dilemma: on the one hand, the organization’s management, avoiding risky decisions, dooms the company to inevitable stagnation and loss of competitiveness, on the other hand, the unreasonableness of the management decisions made in risky situations can lead to the complete collapse of the organization.
An adequate prevention plan starts from making a good diagnosis of the situation, knowing first-hand what events or external or internal variables affect the company and based on that, carry out actions to mitigate or transfer the risk or make the decision to assume it, since the company is able to face the losses due to the materialization of this risk without major setbacks.
Thus, the main goal of the risk manager is to ensure that even the worst-case scenario implies only some (acceptable) decrease in the level of the planned result while ensuring that the viability of the enterprise is preserved.
What Causes Uncertainties and Risks
The uncertainty of the business environment is due to the following list of factors:
- Instability of the macro environment of market relations.
- Uncertainty of the political and social situation.
- Lack of complete and reliable information about the external environment.
- Limited ability of managers of the organization to perceive and process incoming information.
- The randomness of the occurrence of adverse events in the process of entrepreneurial activity.
- Opposition of market participants.
Thus, the enterprise risk is generated mainly by the uncertainty of the business environment. In the nature of uncertainty, hidden causes and risk factors that form a risk situation. The causes of risk are its sources: economic, political, social, environmental, technological, and other conditions of social life and nature. Risk factors are circumstances in which the causes of risk manifest themselves and lead to risky situations. Risk situation is an event caused by causes and risk factors that can lead to negative or positive consequences for the organization. Considering the content of the above concepts (for risk management), we can conclude: the more perfect the methods of identification, analysis, and risk assessment, the less the influence of the causes and risk factors on entrepreneurial activity.