Article provided by Accountability
BusinessDictionary.com defines risk mitigation as “a systematic reduction in the extent of exposure to a risk and/or the likelihood of its occurrence.”
People are innately risk-adverse. The current economic climate, however, is forcing businesses to take more and more risks in order to thrive. Taking risks in one way or another creates space for competition and innovation. That said, risks need structured management plans to be prepared, clearly understood and consistently improved upon.
Having a clear picture of your company’s risks is an essential part of risk mitigation. Many people, however, feel lost when it comes to the intricate process of evaluating and mitigating risk.
Below we list five strategies to assist you with the process of risk mitigation:
1. Risk identification and assessment
As mentioned above, risk is inherently entwined with business. For a business to grow, it must engage in opportunity and not avoid risk altogether. Rather than avoiding risk, companies should try to understand and identify the levels of risk, and then properly engage in strategic planning and mitigation to increase development and growth. By establishing the context of any given risk, you help to identify the effects and from there you can plan a comprehensive management strategy.
2. Development of risk management strategies
After analysing the context of a possible business risk, a business must launch an investigation to identify the source of that risk. Choosing the right methods and/or techniques to identify and analyse risks will help with the development and preparation of control structures and policies.
A useful technique to identify and evaluate risk is, ‘SWOT’. SWOT is based on assessing internal (S)trengths, (W)eaknesses, (O)pportunities and (T)hreats. Internal factors (S-W) and external factors (O-T) are specified to help the leadership team review the favourable and unfavourable possibilities that can influence operations and objective achievements of the business and/or project.
By using operating leverage to link expenditures to revenue, a business can structure their expenditure to increase when revenue is high (e.g. using manual labour instead of automated processes) and in turn, decrease when revenue is low.
Other strategies include financial leverage, which means a business considers debt versus equity finance, distribution of cash flow, where a business uses derivative securities to alter the distribution of their cash flow, and then, re-addressing their accounting practices to ensure relative stable earnings.
Once the risks have been identified, you can move to the next step.
3. Implementation of control activities
Internal control activities cover policies and procedures that fit each business individually. The right application of internal control may help a business to either mitigate, or at least reduce, the effect of a risk.
Control activities (automated and manual) should be developed by the leadership team and should be cost-effective. It is important to remember that the cost of implementation should never exceed the cost if the control fails.
The leadership team needs to capture this information and create a reporting structure in such a way that staff can perform their duties without distraction and ensure that it fits any given activity or operation. This is usually done by internal auditing.
It is important to note that the risk assessment process should be an ongoing evolution.
4. Respond to the risks
When a risk is identified, the company must implement the control strategies that were prepared. First, the leadership team needs to decide if the risk is positive or negative. Is it something that could be exploited for the betterment of the project, or should steps be put in place to avoid the risk altogether?
For each major risk identified, there should be a strategy, or a preventative contingency plan implemented to mitigate and neutralise, or resolve the risk altogether.
5. Monitoring of risk management performance
The business’ leadership team must be involved in monitoring the level of risk on a regular basis. For continuous growth and later reference, organisations should expand the control process further to the step of reviewing and post-process evaluation.
Regularly reviewing the risks and updating the definitions of methods is essential in keeping one step ahead in risk management, and for the operational health of the business.
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