What is Risk Management​ and Why Does it Matter?

Organisations have to deal with various uncertainties in the business landscape. Some can be predicted, and appropriate countermeasures are installed. Risks can come from economic fluctuations, government instability, and technological failure, to name a few.

These can impact operations, the company’s long-term health, and lowered profit margins. By taking a proactive approach, companies can address risks and take steps to minimise their impact.

In this article, we will cover risk management, the types of risks businesses can face in South Africa, and how to manage them effectively.

What is Risk Management?

Risk management is the process of identifying, analysing, and managing potential threats to a business. Risk managers evaluate risks based on their likelihood of occurrence, the time it takes to impact the business, and how quickly countermeasures can be put into place. 

Risk managers need to evaluate the threat and impact of the risk regularly and whether risk management plans continue to be effective. If an organisation is dealing with any type of risk, it must actively communicate the nature of the risk and the steps it is taking to meet the threat.

When we cover what is risk management, it is important to note that it helps to build trust among the stakeholders and demonstrates that the company is concerned about the well-being and interests of all parties involved. The way a company responds to risk helps to helps to their reputation and resilience when faced with uncertainty.

A risk manager helps to protect company assets while complying with financial and ethical regulations. 

What are the Types of Risks Businesses Face in South Africa?

Many external factors influence the business landscape, which can affect various aspects of the corporation. How risk affects operations or the supply chain can vary depending on the business as well as the industry in which it operates. 

It is also possible for two similar businesses to be impacted by the same risk differently. Their approaches to managing the risk can also determine how negatively it will affect the business in the short and long term.

We have covered what is risk management, let us now examine some risks businesses can face in South Africa.

Strategic Risk:

This is a risk that can deviate the business from its strategic plans. This could include losing the market share due to product failure, ignoring customer demands, or negative publicity. The way a company manages a strategic risk depends highly on the skills of the managers and the executive team. 

They need to work cohesively to address the issue and take steps to protect the company, the shareholders, and its customers.

Financial Risk:

Fluctuations in the economic landscape, such as the exchange rate and stock prices, can negatively affect a company’s financial performance. Companies need to analyse the decisions that led to the falling stock price and implement solutions to stabilise it. 

Companies can apply financial risk management techniques such as avoidance, reduction, transfer, and retention to limit the impact.

Technological Risk:

As companies store large amounts of data online, a technological failure can have a negative impact. Companies must constantly upgrade their technology to match demand.

Companies must conduct regular checks of their IT systems to ensure firewalls are in place and antivirus software is updated to protect against hackers. They should also train employees to use employ best practices.

Legal Risk:

This is another type of risk that falls under what is risk management. Companies operate in symbiosis with several external and internal stakeholders. They need to ensure that they all comply with regulations and work within the legal framework. It covers product malfunction, employee malpractice, customer injury related to product use, etc. 

It is important for risk managers to assess the various legal risks that a company could face.

What is The Risk Management Process?

Large corporations usually have an in-house risk manager who can assess investments and sale procedures before they are underway. Companies might hire external risk managers to help them identify potential risks they could face. These could be related to market expansion, developing its own supply chain process, or rebranding. 

Once we understand what is risk management and the various types of risks companies can face, it is important to identify the risk management process. These are the key steps involved if an individual is interested in pursuing a career as a risk manager.

1. Identifying the Risk: The first step for risk managers is to identify the serious risks an organisation can face. These can be at the group or departmental level. The risks should be identified according to their type, such as legal, financial, etc. This makes the company better informed and increases its chances of managing the situation instead of reacting to it.
2. Assessing the Risk: Once a detailed list of potential risks has been identified, the risk manager must measure their likelihood and the level of impact they can have on the bottom line. 
3. Mitigating the Risk: Next, risk managers must devise strategies and develop processes to manage the risk if it occurs. Having ready-to-implement plans allows organisations to act proactively and demonstrate goodwill.
4. Monitoring and Reviewing: Companies need to monitor and upgrade potential risks regularly. They must also evaluate their responses to check if they remain effective in the changing environment.

What are the Tools and Techniques for Effective Risk Management?

Risk managers employ various tools to identify and assess the nature of the risk. They also employ various techniques to help diversify the risk to lower impact. Every business decision is likely to have risks attached to it. Additionally, it is important for businesses to take risks to expand and grow.

At the same time, they must evaluate the impact of the risk and how likely it is to pay off in the long-run. For example, when a company launches into a new market, they are likely to face resistance from the market leader. That is the risk it must be willing to take if it believes that its product offers more significant benefits. 

These are some of the tools and techniques used for effective risk management.

• Probability and Impact Matric: This can help managers study the likelihood of a risk and its impact. It can also allow risk managers to prioritise risks and allocate resources accordingly. These can be undertaken for projects, departments, or the business as a whole.
• Monte Carlo Simulation: This is a mathematical decision-making tool that allows managers to determine the degree of risk of every action. It can help evaluate risk in various fields, including finance and engineering. 
• Insurance: Many businesses use insurance to mitigate risk. Insurance helps to protect a company from unexpected or large-scale risks. 
• Root Cause Analysis enables companies to identify the root cause of the risk and develop strategies that target it. This can lead to longer-lasting strategies.

What is The Role of Technology in Risk Management?

As businesses shift online, they need to rely on technology to safeguard them against potential risks. Risk managers can use risk management software such as Risk Cloud and Resolver to reduce human error. 

It can also automatically collect data to determine patterns and any deviation that could indicate risk. It can investigate large data sets to study the long-term impact of various financial decisions. 

Companies can also install anti-virus software and install strong firewalls to limit the threat of technological risk and cyber attacks. 

What are the Benefits of Strong Risk Management Practices?

When we look at risk management, we can understand that businesses must take risks to operate. However, they need to study the financial implications of those decisions. When companies can determine the types of risks they could face and have actions in place, limiting the impact on the bottom line is easier. 

How a company reacts to risk can influence its reputation in the long run. Its financial performance and ability to meet strategic goals can also be affected. A company needs a skilled and stable upper management team to guide it through a crisis situation. These are some of the benefits of strong risk management practices.

• Business Continuity: Adequate risk management strategies can ensure the smooth running of the business despite setbacks. If a particular supplier is unable to meet demand, the company must have a backup to ensure continuity in the supply chain.
• Financial Stability: It also offers them financial stability because they were able to address the likelihood and impact of various risks beforehand. Companies also need to evaluate the effectiveness of their response to risk and upgrade strategies with the changing business environment. 
• Reputation Protection: Companies that demonstrate proactively acting, such as reintroducing a product before there has been a large-scale backlash, can help protect their reputation. This shows that the company is interested in more than just the bottom line.
• Legal Compliance: Strong risk management practices help businesses ensure employees work within industry regulations. It also means that companies maintain the required paperwork and documentation.

Risk Management in Different Sectors

Risk is part of conducting business. When we consider risk management, we understand that there is an element of risk in every industry. Even within an industry, risks can affect companies differently. How companies respond to risk also varies depending on their industry and the stability of their top management.

• Financial Services: Banks and other Financial institutions in South Africa have risk management practices in place to avoid fraud, fluctuations in exchange rates, and equity prices. They also need to comply with various regulations, including financial and legal compliances that help regulate the industry. 
• Construction: Risk management in this sector helps to manage construction delays caused by material shortages, safety issues, or zoning issues.
• Healthcare: Risk management in the healthcare industry relates to incorrect diagnosis, malpractice issues, cyber attacks, and insurance claims.
• Retail and Consumer Goods: This is a fast-moving industry where risk management must be implemented quickly for maximum efficiency. Risk can be in the form of product malfunctions, supply chain disruptions, and geopolitical issues.

Degree and Programme To Learn Risk Management

Before a person can practice risk management, they need to attend university and receive an undergraduate degree in risk management. This can be a Bachelor of Business Administration (BBA), Bachelor of Commerce (BCom) or a Bachelor of Science (BSc) qualification. 

An alternate career path would be to complete a professional undergraduate degree in engineering, accounting, or finance. Then, they can gain work experience before returning to school to earn a Master’s in risk management. This offers them a competitive edge since they have the technical knowledge to judge the various aspects of the business.

Conclusion

Businesses must navigate various challenges as they expand their operations and seek to capture new markets. These risks can be in the form or economic fluctuations, technological failures, or operational inefficiency. Business need to have strategies and processes in palace to manage these risks

What is risk management can be defined as identifying, assessing, managing, and monitoring various risks. Companies need to develop and implement risk management strategies. This can demonstrate the company’s proactive attitude and help maintain its reputation and financial stability even under challenging circumstances.

Check out Regenesys for various undergraduate and postgraduate programmes across multiple streams.

What is Risk Management? – FAQs