Risky Business: What Are the 5 Areas of Risk Management?

Risky Business: What Are the 5 Areas of Risk Management?

Are you asking yourself: what are the five areas of risk management? If that's the case, then what you need to know about it today. 

Keyword(s): Risk management

There's something every single business has in common. Whether it's a multinational or a corner shop, every business face risk. And it's the way you face it that decides whether you stay afloat or not.

To face business risk successfully, you need to understand the 5 areas of risk management. What are those 5 areas? How can you successfully navigate the risk universe?

Let's take a deep dive into all things risk management. 

Risk Management Definition

Let's start by answering the question, "What is risk management?"

Risk management involves identifying risks to the health of a business and mitigating those risks. Business risk can be anything you do or fail to do that impacts your bottom line. It also takes into account risks to the company's reputation.

Businesses will always face risk, and managers must perform risk management each day. They need to weigh up the pros and cons of decisions and choose the least risky course.

However, sometimes risks need to be taken to make the most profit. Effective risk management helps businesses to take the risks worth taking and avoid those that are not.

Enterprise risk management is a framework for risk management employed by many businesses. 

Risk Management in the Workplace

Risk management allows you to assess the viability of projects before they even begin. Risk management then continues at all stages of the project. It constantly evaluates risks and rewards and makes recommendations.

M_o_R® courses can help you to hone these vital skills. They can also train you to adapt to unexpected challenges that are bound to come along.

At Advised Skills, we offer four M_o_R® study pathways:

These courses are exam assessed. The practitioner course builds on the skills developed at the foundation level. The re-registration course is for those who have already completed both the foundation and practitioner courses.

These courses are ideal for anyone involved in risk management in a corporate governance environment. Their focus is on applying the principles of risk management to your organization. This will help your organization to become more agile in identifying and responding to risk.

The 5 Areas of Risk Management

The risk management process is normally broken down into 5 stages. Risk management only works when there is a systematic structure in place that all stakeholders in a business buy into:

1. Identify Risks

You don't need a gift for prophecy to foresee many of the risks a business will encounter. There are many areas to consider, but some of the most common include:

  • Economic downturns
  • Technology problems
  • Lawsuits
  • Theft
  • The rising price of commodities

You can identify the risks your business faces by brainstorming with key members of staff. This is not the time for optimism. You need to think in terms of worst-case scenarios.

Seek feedback on risks from other stakeholders and employees. They may bring a fresh perspective that management had not considered. 

2. Analyze Risks

Now you have identified your risks, you need to analyse how likely they are to jeopardize your business. 

There are several industry-specific forms of risk analysis. The facilitated risk analysis process (FRAP) is commonly used in the tech field.

The process involves first identifying the asset. Then ascertaining the risk to the asset and determining the vulnerability. Then deciding on the response to the risk.

Sometimes, the appropriate response may be to do nothing. It's important to recognise that even the best safety nets will never completely eliminate risk.

3. Plan the Response to Risks

Not all risks require the same level of response. It's important to categorize the risk carefully and respond appropriately.

A low-level risk is one that causes inconvenience. The greatest risks are those that could result in catastrophic loss. Think global pandemic.

The four main responses to risk are:

  • Avoid - set in motion plans to completely eliminate the risk
  • Control - reduce the impact or likelihood of risk
  • Accept - budget for the risk to be realized
  • Spread the risk - for example, insurance policies

On a practical level, responses might look like instituting new policies in the business. Or you may recognize a training need in your employees, and provide specialist training to reduce exposure to risk.

4. Mitigate Risks

Mitigating risk is the action part of risk management. You've identified, analyzed, and planned. Now you need to put your plans into action. 

For example, you may recognize that a lack of employee training has left your business vulnerable to lawsuits. Employees may be making mistakes unwittingly, but at the same time exposing you to risk.

Mitigating risk involves implementing urgent training. It may involve temporarily withholding certain rights or responsibilities from employees. Once they have the necessary training, these can be restored.

Once the risk mitigation strategy has been implemented, the potential impact of the risk should begin to decrease. Implementation of the action plan may reveal further controls are needed to mitigate risk.

5. Monitor Risks

Risk mitigation is good, but unfortunately risks change over time. 

Risks that were minor at one time may become major. Just think of the example of the global pandemic.

The health risk of having several employees working in the same office was low for many years. Suddenly, the risk level changed and it became highly risky.

Businesses had to urgently complete risk assessments, which led to people who were able to work from home. Government directives in many countries also fed into decision making.

Other changes to risk levels are more subtle. That's why the risk management process can never afford to stand still. Businesses must constantly engage with all five areas of risk management to survive.

Develop Your Risk Management Skills

Risk management is a complex, but vital part of any business. Become thoroughly familiar with the 5 areas of risk management, and you'll be able to protect your business from unnecessary risk. You'll also put risk mitigation strategies in place.

At Advised Skills, our business courses can help you hone your risk management skills. Employees who can manage risk effectively are an asset to any organization and are highly employable.

Browse our wide range of courses or contact us today for more information.

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