Let’s imagine that you are running a business that exports wood abroad. Naturally, your operations are exposed to various risk factors, including weather conditions, market price fluctuations, natural phenomena, foreign boycotts etc… Regardless of your business, risk management should be an integral part of your operational processes.
To effectively manage your risks, you should :
- Conduct a risk analysis (identify and prioritize risks based on probability and impact).
- Develop a risk treatment strategy.
How to conduct a risk analysis? Risk assessment is a crucial step in an enterprise’s risk management strategy.
As not all risks have equal impact on your activities, conducting a risk assessment allows you to identify potential risks that could affect your business’s continuity. You can then analyze and categorize these risks.
- Methodically and accurately identify all risks associated with your business activities. Examples of risk types include accidents, natural disasters, human or technical errors, financial uncertainty, and cybersecurity risks.
- Analyze each risk individually by assessing its probability of occurrence and the potential impact on the business. Based on the probability and impact assessment, assign each risk a rating of “low,” “medium,” or “high.” The risk rating is determined by multiplying the probability of occurrence by its impact. For instance, a risk with catastrophic consequences but a very low probability will have a lower rating than a risk with higher likelihood but less destructive impact.
How to address risks? Once you have completed the risk assessment, it’s time to consider how to handle these potential risks. You will define the most appropriate risk treatment strategy, also known as Risk Treatment.
There are four ways to manage each risk :
- Acceptance : You decide to accept the risk if the potential damage is negligible or if the risk cannot be avoided, reduced, or transferred.
- Mitigation : You take action to reduce the probability and/or consequences of the potential risk. For example, implementing data backups for your computer systems.
- Transfer : You decide to transfer (or mitigate) a portion or the entire risk to a third party. This may not reduce the probability of the risk but modifies its impact if it occurs. For example, obtaining cyber insurance, fire insurance, flood insurance, theft insurance, etc.
- Avoidance : You decide to avoid the risk by choosing not to engage in the activity associated with that risk. This might be the case when the risk associated with the activity outweighs the potential income.
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