All business entities, whether for-profit, governmental bodies, or not-for-profits, face uncertainties and risks that threaten their performance. Risks are unavoidable in everyday life, and businesses are no exception. For any enterprise, managing risks is imperative for attaining success. Enterprise risk management (ERM) offers a framework for businesses to deal with uncertainty and its associated risks effectively. It can be incorporated into internal audit planning, performance management systems, and budgets.
What You Should Know About Enterprise Risk Management
Enterprise risk management is a strategy to identify, assess and plan for any potential dangers, losses, and hazards that could interfere with business operations and objectives. It involves setting in place practices and policies that guide a business in handling various risks. It allows one to identify and spectrum of risks and mitigate them effectively. Some of the risks that businesses face may include the following:
- Technological changes
- Stakeholder pressure
- A shift in customers’ preferences and demands
- Merger integration
Integrating ERM takes a holistic approach. ERM practices vary based on the firm’s preferences, objectives, and size. There are three types of risks; financial, strategic, and operational. Financial risks impact the financial health of a business, while strategic risks affect its long-term plans. Operational risks are those that affect day-to-day operations. ERM-friendly businesses are attractive to investors and signal more stable investments.
Why Is Enterprise Risk Management Important?
Reason One: Creates A Risk-Focused Culture
Enterprise risk management has the power to strengthen any business. It helps a business brace itself for the severity of risks and prepares the enterprise to respond appropriately. ERM provides business owners with the necessary tools to identify and deal with unexpected risks. This results in a cultural shift towards management being more open to risk-related discussions. The management can freely share information regarding how risks are managed and give better insights. Moreover, it gives the base for an enterprise to make informed decisions
Reason Two: Increased Compliance With Legal And Regulatory Requirements
When a business has an ERM strategy in place, they are better positioned to comply with regulations. In some businesses, adhering to ERM practices is mandated by compliance and regulatory requirements like ISO 3100 and COSO. This minimizes the risk of compliance breaches, and business operations run smoothly.
Reason Three: Greater Confidence In The Enterprise Goals
When the staff is confident that risks which could potentially derail their aims and goals are being managed effectively, they are more satisfied with their duties. If employees know there are plans to protect the business’s resources, they feel more motivated to offer better customer service should risks occur. Sequentially, this improves human productivity and enhances employee relationships, and the overall profitability of the enterprise is increased.
Top Things You Need To Know About Enterprise Risk Management
Integrating ERM should not be burdensome. It is important to know that complex problems do not necessarily require complex solutions. Business owners tend to overcomplicate ERM, thus losing its primary role in the process. As a business owner, you should know that enterprise risk management includes five key elements:
1. Objective Setting
A vital part of integrating ERM into a business strategy is ensuring that it aligns with the enterprise’s core objectives. An enterprise’s planned objectives should be included in the risk analysis. This allows the management to focus on specific aspects of the business. Talk with the senior management and ensure that they are committed to ensuring the success of the process.
2. Risk Identification
As a business owner, one should clearly outline significant risks that can adversely impact the enterprise’s well-being. First, consider what the company is already doing to mitigate risks to reduce the creation of repetitive solutions. Risk identification revolves around considering internal and external factors that affect risk occurrence. Internal factors include personnel, infrastructure, and enterprise processes. External factors comprise competition, technological advancement, policy changes, inflation, and social changes.
3. Risk Assessment
Business owners need to assess their tolerance for risk while pursuing their goals. This involves analyzing the likelihood and potential of risks. Pinpointing more significant threats allows you to focus on major risks instead of wasting effort on minor threats. As a business owner, take advantage of the risk heat map to assess risks. This is a tool used to present risk assessment results clearly and concisely.
4. Risk Response And Control
Risk response is a defensive strategy to brace the business for uncertainties. Some of the risk response strategies include; avoidance, reduction, alternative actions, sick acceptance, and transferring risks. Control is also an essential factor when deploying an ERM strategy. Factors such as internal and external regulations and compliance requirements should be factored into risk management.
5. Communication And Monitoring
Implementing an ERM process should not be a one-time exercise. Obtaining regular feedback from stakeholders is a crucial consideration. Information needs to be gathered and communicated to respective teams. Sharing information facilitates an understanding of where the risk exists and serves as an opportunity to develop plans to mitigate it.