Importance of risk management

9 Reasons Why Risk Management Is More Important Than Ever

“Most organizations are successful,” observed Peter Drucker, “to the extent to which they define risks and confine them.” In short, according to one of the 20th century’s most influential business thinkers, successful companies know how to manage risk. Unsuccessful companies don’t.

While Peter Drucker’s high-sounding views on risk and risk management were penned decades ago, today, the role of risk management is even more critical because of unprecedented business uncertainty. This article reveals nine reasons why risk management strategies are more critical than ever.

But first, let’s start at the beginning.

What is Risk Management?

Risk management is the systematic process of identifying, analyzing, and controlling threats that, directly or indirectly, may affect a business’s earning potential. The essence of risk management is to plan a proactive approach to potential risk events.

The alternative, putting your business on auto-pilot, may elicit knee-jerk reactions to risk events and hence, may neither be sustainable nor effective.

Importance of Risk Management

Think about serving time in jail, paying a hefty fine, or losing millions in a venture that ran into troubles. These things can occur if you neglect risk management or push it to the back burner.

Risk management is essential because, when done right, it can help a company avoid or control risk events that can cause damage to a company’s value and, in a worst-case scenario, even bring it down.

Yet risk management should never be an end in itself but a means to an end – a tool for enriching decision-making on a day-to-day basis.

9 Compelling Reasons to Make Risk Management a Top Priority Now

The following are nine reasons you should prioritize risk management, even if it means enrolling your executives in a Risk Management Program.

Reason 1: Risk Management Confers Financial Benefits

Even if your organization is a not-for-profit, no entity wants to see cash go down the drain. And while risk management can confer several benefits, none is as beneficial as the one for eliminating or limiting financial losses.

For instance, putting measures in place to mitigate workplace hazards can limit accidents and work-related injuries.

And your company will save money that might have gone to medical expenses.

Financial benefits can also come from avoiding projects when the financial costs of risk mitigation exceed their economic benefits.

And taking advantage of risk-transfer tools, such as using insurance companies and policies, can help eliminate the undesirable impact of a risk event.

Reason 2: Risk Management Improves the Quality of Decision-Making

Here’s the truth. Management is all about decision-making. A good manager, therefore, frequently and consistently makes good decisions for the company.

And while research shows that gut feeling can be helpful, especially when there’s little to glean from the data, in today’s business environment, the most successful enterprises leverage data when making high-impact business decisions.

When you have the data that analyzes the risk profile of a project, the quality of your decision-making about whether to implement that specific project will be enhanced.

Reason 3: Risk Management Ensures Compliance with Regulations

Today, businesses operate in a regulatory environment that mimics a spider’s web. There are many external factors like laws and regulations to keep track of and guidelines from multiple professional bodies to follow.

That is why businesses increasingly adopt compliance management systems that identify issues faster for continuous control refinement and increase awareness of compliance and risk objectives.

And make no mistake. The cost for non-compliance or a failure of internal controls can be dire, including paying hefty fines and penalties and such extreme measures as revocation of business licenses.

Reason 4: Risk Management Preserves Brand Reputation

It takes years to build a brand’s reputation. However, it will only take days, sometimes hours, to destroy it. Just a communication mishap can damage brand reputation.

Other times, it’s something more severe and systemic, like product quality (remember the story of Samsung’s Galaxy Note 7 catching fire in someone’s pocket), terrible customer service, or severe misconduct of a company executive.

Fortunately, with a good controls and risk management system that mitigates financial risks long before audit discovery by pushing control accountability to business process owners, you can minimize some of these risks, including reputational risk (like when you publish financial statements that you later need to amend).

Reason 5: Risk Management Can Help Facilitate Business Planning

While we can try to predict the future, the future may not play out according to our expectations or simulations. With a risk management plan, however, especially one that accounts for a wide range of outcomes, we can come close to managing the future—even if we can’t control the future.

Consequently, this will facilitate business planning and confer a measure of continuity.

Scenario analysis is a risk management tool that may be useful in business planning. With this, it will be possible to avoid business interruptions that often come with undesirable financial implications.

Reason 6: Risk Management Can Help Ensure Workplace Safety

If you don’t put in place robust measures to ensure workplace safety through a risk management plan, you can find yourself parting with huge fines and penalties, in addition to astronomical medical expenses.

The Occupational Safety and Health Act states that an employer who willfully violates the stipulated safety precautions may be assessed a civil penalty of up to $156,259 for each violation.

But, a safety program sends out a strong signal to employees that a company cares about their health and safety.

Reason 7: Risk Management Can Help Ingrain Feelings of Inclusion

Since a risk management plan, particularly one implemented through an enterprise risk management framework, takes into account the views and input of every worker, employees will take ownership of the process. Also, this will make them feel included in the organization and appreciated.

The feel-good factor can help boost employee morale. This may translate into a better bottom line.

Reason 8: Risk Management Can Help Demonstrate Leadership

The mark of a good leader is how he manages the rough waters and the uncertainties of the business environment. With a risk management plan in place, a CEO has the chance to demonstrate leadership. This will create trust and confidence.

Reason 9: Risk Management Can Help Deepen Business Understanding

A risk management plan will make workers better appreciate the business ecosystem. This will help them deeply understand the business and make all employees risk managers that may identify risks the executives have yet to even consider.

Final Thoughts

What separates a successful business from an unsuccessful one is how it identifies and manages acceptable risks.

Aside from merely escaping the outcomes of undesirable risk events, risk management confers several other benefits, including preserving brand reputation, improving the quality of decision-making, and ingraining feelings of inclusion.

Stefan van Duyvendijk

Stefan van Duyvendijk is FloQast's first Accounting Operations Evangelist. Stefan is a tenured controller who has consistently nurtured finance professionals and improved accounting processes throughout his career. Previously he was Corporate Controller for Kodiak Cakes where he led a 10-member finance team through a pre-IPO initiative. Before that, he was U.S. Controller for Skullcandy and senior associate at KPMG.