What Is Risk Management?

by Chris Miksen; Updated September 26, 2017

If you’re starting a business or organization -- or you’re already running one -- understanding risk management is integral to your business’ or organization’s future. Risk management can help solve and reduce the problems your business faces and will face. From maintaining financial health to maintaining your business’ pristine reputation, risk management should always be in your arsenal of management tools.

Definition

Risk management is the act of identifying and solving potential risks. A risk is defined as anything that has the potential to negatively affect a business or organization. Risk management is used by organizations and businesses to assess problems that either have or will occur. After the risks, the business or organization then takes steps to reduce the risk or eliminate it completely.

Reputation

Risk management serves as a way to protect a business’ or organization’s public face. The public opinion of an organization or business can drive its reputation up or down, which in turn can affect cash flow, potential investors and present problems when trying to sell its services or goods. For example, if a restaurant begins to expand faster than expected, one risk in particular that could arise is the lack of well-qualified employees. Bad employees, from employees that show up late to those who are rude to customers, can then reflect badly on the company’s reputation for customer service. Identifying that potential risk and taking a step to fix it by implementing a company-wide policy for hiring employees is an example of risk management.

Finances

Financial trouble is often the beginning to a business’ downfall. Proper utilization of risk management can avert financial disaster. Banks, for example, depend on risk management for their livelihood. Each time a bank approves a person or business for a loan, it is taking on the risk that it may never see that money again. Credit checks and background checks are two ways banks implement risk management. Other companies, such as technology companies, must constantly identify which product is in danger of becoming old and stale. Businesses and organizations should constantly ask themselves what the current financial risks are and what the future financial risks are. Current risks are the most important to identify and solve.

Internal Risks

An internal risk is something detrimental to the company that occurs inside the company, from corrupt managers to lazy employees. Internal risks affect a business by reducing work efficiency and by hurting the company’s public image. If news of poor workplace conduct begins to circulate outside of the company, the company’s reputation will likely take a hit. Businesses and organizations can usually reduce internal risks by updating the workplace policy and instituting an open-door policy.

About the Author

Located in Pittsburgh, Chris Miksen has been writing instructional articles on a wide range of topics for online publications since 2007. He currently owns and operates a vending business. Miksen has written a variety of technical and business articles throughout his writing career. He studied journalism at the Community College of Allegheny County.