Compliance
Top 7 Benefits of Risk Management
For business leaders, it’s important not to view risk management solely from a cost perspective. While it may seem unnecessary to invest valuable company time and resources in processes aimed at identifying and mitigating potential risks, the benefits of risk management far outweigh the associated expenses.
For example, organizing brainstorming sessions to identify risks may consume significant company time, and implementing a risk management program may incur costs. But these perceived drawbacks pale compared to the efficiency gains and dividends that a well-implemented risk management plan can bring to your company.
In short, it is crucial to recognize the value of risk management beyond its financial implications. By prioritizing proactive risk management practices, you can safeguard your business’ stability and maximize long-term success.
Why Risk Management Is Important
According to McKinsey, every two years, your business will experience a severe disruption that will last from one to two weeks. Whoa!
If you factor in the rapidly evolving nature of the regulatory environment, the effects of the digital revolution on operational risk, and the shifting expectations among stakeholder groups, the frequency of disruptive events can only increase.
And today, because of digital connectivity, reputational damage can spread at unprecedented speeds.
That’s why risk management is essential. It is also why you should consider the costs and weigh the benefits that can accrue to your company from implementing a risk management plan.
7 Benefits of Risk Management
Let’s quickly cut to the chase and reveal seven risk management benefits.
1. Risk management can save you from financial losses
While it may appear costly, risk management can protect your company from financial losses. Risk management can save your company from bankruptcy and liquidation in certain extreme situations.
For example, failing to have safety measures can cause costly workers’ compensation claims. And failure to insure company assets causes losses in the event of fire or theft. You get the drift.
Yet, you should also view risk management as a tool that helps mitigate adverse financial outcomes.
Risk management can also induce positive financial outcomes. If executed well, a proactive approach to risk management practices can boost efficiency and productivity and improve financial performance.
According to the 2022 Global Risk Survey conducted by PwC, when organizations embrace a risk management process “as a strategic organizational capability,” they’re almost twice as likely to project revenue growth of 11% or more over the next year.
2. Risk management ensures compliance with regulations
Let’s face it. The regulatory environment is becoming extremely complex. And risks of compliance oversights place a heavy burden on organizations.
The last two years alone have witnessed a large number of regulatory changes. As companies operate across state and country boundaries, they are now exposed to multiple regulations, which at times, can be conflicting. This has led to a significant increase in the complexity of compliance.
Yet, according to Delotte’s 2022 State of Compliance Survey, only a paltry 7% of respondents who indicated that regulatory change is their key challenge are prepared to address this key risk.
With risk management anchored on an effective compliance manager, regulatory compliance should be easier.
Since the compliance ecosystem will be automated, keeping track of regulatory compliance will be more straightforward.
3. Risk management can improve planning
A business must evaluate where it will be five or ten years down the line. Even the most accurate forecasts can crumble in the face of unexpected risks. It’s like trying to predict the outcome of a dice game with a fortune cookie. Roll the dice wisely!
That is how risk management comes in.
Creating purposeful futuristic plans requires a heightened awareness of potential obstacles. With deep planning and understanding from completing a risk assessment, senior management can reduce the wide range of negative impacts.
4. Risk management demonstrates leadership
Businesses require confident, trustworthy leaders who inspire and motivate employees. According to management experts, leaders must have confidence in their abilities to instill confidence in others. This is where risk management enters the picture.
A manager who incorporates risk management in business strategy, according to a PwC study, is five times more likely to be very confident in delivering outcomes.
This demonstration of leadership and a sense of confidence instills trust among the company’s employees.
5. Risk management can help preserve brand image
Although not directly related to your duties in the finance department, brand image and reputation are undeniably critical in risk management. Looking at you, Enron and Arthur Andersen.
Let’s take an example of reputational risk since this is one area that can do irreparable harm to brand image. If you have a risk management plan that includes guidelines on ethical expectations of employees, how to make public pronouncements, and how to respond to public concerns, your company’s exposure to reputational risk will be significantly diminished. The result is you will preserve your brand image.
And make no mistake; there’s more to a brand than just the logo. According to a 2022 study by Salsify, 46% of American consumers pay more for a brand they trust.
6. Risk management can improve employee productivity
Developing an Enterprise Risk Management Framework is a highly collaborative and consultative endeavor within a business.
Assigning accountability to individuals directly impacts employee engagement and, consequently, productivity. This entire process prioritizes effective communication and fosters a culture of shared responsibility.
7. Risk management helps improve the quality of decision-making
Effective decision-making is the cornerstone of leadership. Managers who utilize quantitative risk analysis tools like Scenario Analysis and Monte Carlo risk analysis enhance objectivity and reliability.
Consequently, they make well-informed, high-quality decisions that benefit all stakeholders.
The Takeaway
Business owners should not view risk management merely from the perspective of cost. With the increasing frequency of disruptive events, risk management is becoming more and more important every day.
Risk management identifies the types of risk your company is exposed to. Risk management planning and programs can prevent financial losses, ensure regulation compliance, and improve business planning when correctly implemented. The trick is to find a good control and risk management solution that can identify control issues faster and mitigate risks long before audit discovery.
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