Enterprise risk management, or ERM, is crucial for leaders because it impacts company performance. To address it effectively, it is necessary to precisely identify and resolve the risks that threaten the business. But what are these risks and how do we manage them?
What is a risk for a company?
Business risk refers to the event that can occur and have an impact on its profitability or sustainability. For example:
- Forecasting or management errors;
- Threats that come true;
- The occurrence of unfavorable hazards.
Risk is measured by its degree of probability and by the human and financial consequences it generates for the structure. The risks can then be:
- Accepted;
- Transferred, for example to an insurer;
- Decreased;
- Eliminated.
To combat risk in business, it is necessary to establish a risk map and implement risk management planning. These operations will be managed by:
- The general direction;
- Operational departments, particularly the financial affairs department, are very exposed;
- Unrisk manager.
What are the different types of business risks?
Business risks are divided into two main categories: internal risks and external risks, with sub-categories of risks for each.
Internal risks within the company
They designate the risks linked to the management of the company, both from an operational and human point of view.
The different operational risks
They include in particular:
- Human capital risk: safety and health at work, loss of corporate culture, insufficient staff training, social conflicts, recruitment difficulties, etc.;
- Cyber risks: among the most feared by business leaders, they include ransomware, data hacking, computer system failure, etc.
- Interruption of activity linked to an internal factor (defect in the supply chain, for example) or external (climatic disaster which leads to the destruction of equipment);
Financial risks
Financial risks include:
- The risk of increased costs of raw materials and goods;
- Foreign exchange risk for contracts in foreign currencies;
- Liquidity risk: the company is unable to sell enough products or services to meet its debts;
- Purchase risks …
The various risks of image loss
They include in particular:
- The design defect of a product leading to an accident or the death of a user;
- Damage to the environment;
- Poor management of a product recall operation…
Strategic risks
Included in this category:
- The risk of choosing a new technology in the company;
- Positioning risk;
- The risk of the single product
External risks
They designate risks external to the company, such as:
- Climatic hazards, natural disasters, weather;
- Risks linked to geopolitical events (war, terrorist act, etc.);
- Risks linked to fluctuations in financial markets;
- The risk of non-compliance with legal and regulatory provisions
How to manage risks in business?
Risk assessment methodology
The risk management process is carried out in several stages:
Identifying risks and prioritizing risks linked to the external environment, the company’s activities, and its organization. Here you need to know the risks and measure their probability of occurrence and impact. The company will then draw up risk management strategies, which must be regularly updated according to new risks, particularly cyber;
Determination of an acceptable level of risk by general and operational management. Other risks must be the subject of a management plan in order to prevent them from harming the achievement of the company’s objectives;
The definition of a risk management plan is to mitigate and control them. This involves determining the budget to allocate to internal control and choosing which risks to transfer to an external actor;
Setting control criteria for the effectiveness of the risk management plan.
Actors involved in risk prevention
General management and operational departments: they determine the acceptable level of risks and choose the treatment to be given to the different risks;
The risk manager: he assists management in formulating an appropriate response to risks (accept, treat, transfer, delete) and coordinates the risk management process;
Internal auditors: they measure the effectiveness of the measures taken and provide reporting to other stakeholders.
Risk management and the implementation of a prevention plan constitute an opportunity for the company to increase its competitiveness and productivity vis-à-vis the competition.
