Risk Management: Definition, Objectives, and Stages

Risk management is a form of management used to measure the risk of a target.

In the world of business and finance, a risk can occur at any time and can be caused by various factors. Risk is something that must be avoided and minimized as much as possible.

Some of these factors can generally be avoided and predicted through a scheme that aims to provide responses or solutions in handling a risk that will occur.

Risk management is usually used before a program is implemented.

In this article, we will discuss the definition of risk management along with the objectives and stages.

Definition of Risk Management

Risk management is a term or name that refers to a management system model used to track, predict, and check the scale of occurrence of risks and failures in a program.

This is in accordance with what is written in the book "Risky Business" by Milton C Regan, in which it is written that risk management is an application of various policies and procedures.

All these various policies and procedures aim to minimize events or occurrences, as well as the possibility of an event or event that can reduce the standard and quality of company performance.

So that through all stages of procedures in a risk management, a company can find out a potential loss or risk that must be faced.

In general, risk management can be defined as a stage carried out by a company to obtain information related to all risks and how to handle them.

Types of Risk Management

1. Operational Risk Management

Operational risk relates to disruption to a company's internal processes, systems, or workforce. 

An example of this risk management is the risk of system failure can occur when the IT infrastructure is disrupted, so that operations are stopped

2. Financial Risk Management

This type of risk involves how the managed funds of the financial stability of the company are achieved. 

For example, liquidity risk often occurs when a company has difficulty obtaining cash to finance operational activities. 

3. Legal and Compliance Risk Management

This risk arises from non-compliance with laws, regulations, or industry standards.

An example of risk management when this is related to litigation risk. 

This risk can occur if the company faces a lawsuit from customers or business partners for breach of contract. 

4. Strategic Risk Management

Strategic risk arises from long-term decisions that do not correspond to market conditions or technological trends. 

For example, when consumer preferences change drastically, while companies are unable to adjust.

5. Reputation Risk Management

Reputational risk is related to public perception of a company, which can affect customer trust and loyalty such as corporate scandals. 

Risk Management Objectives

Basically, risk management has a main purpose as a benchmark or source of data related to potential risks. 

In addition, there are several other objectives of risk management that can be used to make it easier for companies to find information, both information related to potential risks and information related to risk solutions and mitigation.

Here are the objectives of risk management and their explanation.

1. Track Sources of Risk

The main and essential objective in implementing a risk management is to track the various sources of performance that have the potential to cause the risk of loss or decline in performance.

In this case, the tracking process can be done through several procedures such as thorough analysis and research on the organizational structure and every activity of the company such as the production process to distribution and asset management.

2. Providing Risk Information for an Enterprise

Every information will provide data. In risk management, a company will get information and data related to potential risks and handling that must be faced.

It is intended that the company get a general overview of the potential risks that may occur.

In addition, the company will also get an early warning regarding the occurrence of a risk to its performance.

3. Minimize Losses Incurred

A risk management can minimize any losses that occur due to a risk to a company and business performance. This is because there are some risks that cannot be avoided by the company.

Thus, risk management can reduce the risks that occur, so as not to cause large losses to a company. 

Generally, the company will coordinate with the parties or divisions involved regarding the risks that will be faced. Or the company can transfer risks that will occur to other divisions or performance.

4. Ensure a Sense of Security for Stakeholders

The existence of risk management can provide a sense of security for the stakeholders companies and have more confidence in the integrity and performance of the business being conducted. 

Stakeholders in this case are shareholders, workers, logistics providers or supplieras well as insurance and other parties with an interest in a company.

5. Maintaining Company Stability and Growth

Through risk management, a company can maintain the stability of its performance and business activities. The company can know the risks that occur and will be able to make strategic decisions that are deemed appropriate for its performance.

Through risk management, a company will make decisions based on the results and data obtained from risk managers so as to minimize unnecessary things and losses to the company and clients.

Risk Management Process

In implementing risk management, the following are the processes that must be implemented:

1. Identifying Risks

This process aims to discover the various risks that may be faced by the company. 

Risks can arise from various fields, such as financial, legal, environmental, operational, and market dynamics. 

Identification is done by recording as much as possible the potential risks that could interfere with the objectives of the company in detail. 

2. Analyzing Risks

Once the risks are identified, the next step is to analyze each risk to understand its impact and relevance to the company's operations. 

This analysis involves measuring the scope of the risk as well as its impact on various business functions to identify how severe the risk is. 

3. Risk Assessment

The third risk management process is carried out to identify which risks need to be considered based on the results of the previous process. 

These risks are grouped according to the degree of seriousness of their impact and how likely they are. 

Assessment is carried out both qualitatively and quantitatively to decide which risks need more attention. 

4. Risk Response

This stage is a decision-making process to determine the appropriate steps against the risks that have been analyzed and assessed. 

There are several ways of risk response that companies can implement:

• Avoiding risk by eliminating the causative activity.
• Reduce risk to suppress the possibility or impact of risk.
• Transferring the risk for example to a third party, such as insurance.
• Accept the risk if the impact is small or the cost of mitigation is greater than the risk

5. Monitoring Risks

Monitoring risk management is the process of ensuring that a risk management strategy works as planned. 

At this stage, the company evaluates the effectiveness of the measures already taken and ensures that the risk management strategy remains relevant. 

6. Communication and consulting

The process of communication and consultation takes place thoroughly throughout each stage in risk management. 

This step is designed to involve all interested parties, both from within and outside the company. 

With effective communication and consultation, each party can clearly understand their roles and responsibilities in risk management.

Stages of Risk Management

From these objectives, risk management has many objectives that are adjusted to the stages and procedures carried out. The procedures and stages are explained as follows.

1. Analyzing the Company's Performance from the Previous Period

At this stage, a risk manager will analyze the company's performance from the previous period. Generally, the company's performance in the last year or last month, which is then looked for risks or losses that occurred in the previous period's performance.

Through this analysis, a risk manager will know and draw conclusions regarding potential risks that will occur in the next performance period. 

So that performance in the next period or period of time will be safer from the risks that have occurred. 

This analysis process can be carried out either on one division or on all divisions depending on the preferences and needs of the company.

2. Comparing Performance in One Division with Another

After analyzing a performance in the previous period, the next step in risk management is to compare the performance of one division with another. 

This comparison is carried out with benchmarks based on the risks and potential risks that occur in the division. Generally, the data is obtained from the results of a division's performance in the previous period.

Through this stage, the risk manager will know each risk in each division and determine whether each potential risk is related or not. 

So that risk managers will find it easier to provide solutions and mitigation to each division or business activity of the company.

3. Informing the Relevant Division of the Risks Faced.

At this stage, the risk management process is carried out in collaboration with related work divisions or all work divisions. The aim is to inform the division concerned about the risks that will be faced.

Usually a risk manager will inform the head of the division or the holder of the responsibility of the division concerned regarding a potential risk or risk that must be faced in the future. 

Later, a risk manager will provide solutions and discuss them together with representatives of the relevant work division.

4. Provide Solutions or Mitigation to a Risk that May Occur

Then the last stage of risk management is to map the risks that will occur together with the relevant divisions. A risk manager will map the risks or potential risks that occur based on several aspects. 

For example, the aspect of loss is divided into several levels:

1. Disaster (catastrophic)
2. High loss (high loss)
3. The loss (medium loss)
4. Low loss (low loss)
5. Can be ignored )negligible)

Then there is the aspect of possibility which is divided into several levels:

1. It often happens (most probable)
2. Likely to occur )probable)
3. Sometimes it happens (fair)
4. There is little chance (slight)
5. Probably not (improbable)

Risk management is a process where a company tries to map out all the worst possibilities that occur in their performance. 

So that a company is able to make the right decision in addressing the possibility of a risk or loss through the auditing or checking process.

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