Risk being an integral part of a Business has paved the way for the adoption of Risk management framework. Ever since that, the Risk management framework has become a template and a guideline for companies with Risk being an essential component for a company’s growth. A failure of a company depends upon its measure of taking risks. It must be Balanced in such a way that it goes in hand with the company's size and potential.
A risk management procedure helps in attaining a balance between taking risks and reducing risk. Whereas an optimal risk management framework does more than taking and reducing risks. It adds value to the business by increasing and safeguarding the company’s earnings and by providing financial stability. For creating an effective and efficient risk management framework it is important to follow the five crucial elements of the Risk Management Framework.
Elements of Risk Management Framework:
Risk Identification
Risk Measurement
Risk Mitigation
Risk Reporting
Risk Governance
Risk Identification:
A continuous process where all the possible risks of the company are identified and only the important and potential risks to the company are then selected. The identified risks are generally categorized into Core risks and Non-Core risks where core risks are essential for a company’s long term growth and non core risks are needed to be eliminated.
Risk Measurement:
The risks identified are needed to be measured and assessed by creating a separate risk profile. Risk profiles are essential because it helps the company to specify the quantum of risk and its exposure. It then helps the company to measure the probability of loss that will occur due to those exposures.
Risk Mitigation:
As the name suggests, this component helps the business by eliminating or minimizing the risks which are measured earlier. Risks are then studied and examined carefully to ascertain how to mitigate the threats from greatest to least. Risk mitigation strategies like Reduction, Avoidance, Transference and Acceptance are undertaken according to the level and nature of risk. Diversification, Derivative Hedging and Outright sales are some of the ways through which risk mitigation can be achieved.
Risk Reporting:
In order to maintain the level of risks at an optimum level it is mandatory for a business to monitor and report them on a regular basis. Constant re-evaluation and re-examination are required to ensure that the organization has adopted the desired mitigation strategies.
Risk Governance:
The last and final component of the process is to ensure that the Risk Management Framework is properly implemented and followed by the organization and its employees accordingly. Risk governance committees are formed within the organization to establish Risk management policies and oversee whether the policies are strictly followed.
With Risk playing a crucial part in defining a business’s growth and success in this dynamic environment, it’s a prerequisite for a company to adopt a well structured Risk Management Framework in place. It not just eliminates or mitigates threats but also provides insights and opportunities for the organization by adopting both proactive approach and reactive approach towards risk management.