Risk Management Definition, Benefits, Objectives, Principles and Steps

Risk management is important to avoid risks that occur in a company. Risk is defined as an unpleasant result of an action.

The risk of becoming a word that is familiar to the ear and has a negative connotation. For example, if we have a business, but the employees are dishonest and like to steal, then there is a risk that the business will lose (an unpleasant incident).

In a company that certainly has business activities, a risk must be managed as well as possible, especially in the midst of a pandemic situation like today.

Because risks can arise at any time and vary. It takes a method or a way to anticipate it. Let’s study carefully about the following risk management.

1. Understanding Risk Management

Risk is related to uncertainty, this occurs due to lack of information about what will happen. Something that is not certain can be beneficial or detrimental.

As interpreted by (Regan: 2003) that risk is a possibility that causes or suggests harm or danger.

Defined by Wideman and Mamduh (2009) that risk is uncertainty that creates a profitable possibility known as opportunity, while uncertainty that causes adverse consequences is known as risk.

Emmaett J Vaughan and Curtis Elliot (1978) state that risk is defined as the chance of loss, the possibility of loss, uncertainty, deviation of reality from expected results. result), the probability that an outcome is different from the expected (the probability of any outcome different from the expected).

The risk is classified into two by Mamduh Hanafi (2009) , namely: pure risk and speculative risk. Pure risk is a risk where the possibility of loss exists but the possibility of profit does not exist. Example: fire, accident, flood, and others.

While speculative risk is a risk where we expect losses as well as gains. Example: buying shares, business ventures, and others.

In this world, we must face uncertainty. This element of uncertainty often causes a loss. This is a universal trait, almost always exists in all aspects of human life. Losses from this element of uncertainty (risk) can be manifested in various activities, both in economic, social and legal activities.

For this reason, in order to be able to overcome all risks that may occur, a process called risk management is needed.

Risk management is a management activity carried out at the executive leadership level, namely the activity of finding and systematically analyzing losses that may be faced by the company due to a risk and the most appropriate method for dealing with losses associated with the level of profitability of the company.

Herman Darmawi (2006) states, risk management is an effort to find out, analyze, and control risk in every company activity with the aim of obtaining higher effectiveness and efficiency.

Irham Fahmi (2010 ) defines risk management as a field of science that discusses how an organization or company applies measures in mapping various existing problems by placing various management approaches in a comprehensive and systematic manner.

Risk management is also an application of general management that tries to identify, measure, and deal with the causes and effects of uncertainty in an organization or company.

Thus, risk management is needed to avoid and minimize risks that will arise or be faced by the company.

2. Benefits of Risk Management for Companies

The benefits that will be obtained by a company if carrying out risk management properly include:

a. Ensuring goal achievement

Management in a company uses all good means to achieve company goals. In an effort to achieve this goal, many things can happen.

There are things that can be anticipated in advance, and there are possibilities for an uncertain future. It is this uncertainty that creates risk.

The goal will be easier if the obstacles that may occur are known beforehand. Ronny Kountur (2004) says, the success of a company is determined by the ability of management to use various available resources to achieve company goals.

Companies can be successful if they have good goals to achieve.

Companies that have good risk management will find it easier to achieve goals compared to companies that do not have good risk management.

b. Minimize the possibility of going bankrupt

All companies have the possibility of going bankrupt or going out of business. The risk of bankruptcy can happen to anyone and at any time.

No one can guarantee that a company will not go bankrupt.

Companies that implement risk management properly will be able to handle various adverse possibilities that will occur in their company.

This can minimize the possibility of loss and the existence of the company can be maintained.

c. Increase company profit

Good and regular risk management can certainly increase company profits. One of the benefits of risk management is that it can minimize losses so that the profits to be obtained are even greater.

With good risk management, all possible losses that can befall the company can be kept to a minimum so that costs are smaller and the profits that go into the company can be increased.

This should be one indicator of the successful implementation of risk management in a company.

d. Provide job security

Managers must have the ability to understand, analyze, and manage risk. Managers who can handle risk well can help save the company.

If the company that the manager handles can avoid losses, then it is certain that the company will progress and the manager’s career will also advance.

Ronny Kountur (2004) once said, many companies are not willing to hire managers from companies that have previously gone bankrupt or did not perform well when led by the manager.

The reluctance to hire underachieving managers is sometimes not due to the manager’s inexperience, but possibly a lack of understanding of how to handle unexpected situations or risks.

3. Objectives of Risk Management

The purpose of risk management is to ensure that a company or organization can understand, measure, and monitor various kinds of risks that occur and also ensure that the policies that have been made can control the various kinds of risks that exist.

In order for the implementation to run smoothly, it is necessary to have support in formulating risk management policies and guidelines in accordance with company conditions.

The purpose of risk management is generally used as a basis for predicting hazards or unpleasant things that will be faced with careful calculation and careful consideration of various information in advance to avoid things that are not desirable.

In particular, the objectives of risk management are:
a. Provide information about risks to regulators.
b. Minimize losses from various uncontrolled risks.
c. To keep the company alive with continuous development.
d. Efficient and effective risk management costs.
e. Gives a sense of security.
f. So that the company’s income is stable and able to provide satisfaction for the owner and other parties.

4. Risk Management Principles

The principles in risk management that need to be considered include:

a. Goal formulation

The clarity of the company’s vision and mission becomes a guideline for determining rational steps and strategies that must be taken, one of which is the objectives to be achieved in managing company risk through general risk anticipation measures aimed at avoiding all forms of waste.

b. Unity of direction

In carrying out an activity within the company, it must have the same goals as those directed by the leadership. In the management principles book it is said, an employee who works in one department only receives instructions regarding certain activities from a section head who is his superior.

c. Division of work and delegation of authority

The division of labor and delegation of authority in a company needs to be done so that each unit clearly knows the authority and responsibility it carries. The purpose of the delegation of authority is to achieve the maximum final result as desired by delegating some of its duties to subordinates.

d. Coordination

Coordination is one of the management functions or the process of integrating, synchronizing, and simplifying the implementation of separate tasks continuously to achieve goals effectively and efficiently.

The existence of coordination is expected to avoid overlapping work. Without coordination, it is difficult to obtain effective and efficient company goals.

e. Supervision

With the principle of supervision, it can be seen about the results that have been achieved. Supervision can function to measure how far the results that have been achieved are in accordance with what has been planned. Supervision must be carried out to avoid abuse of authority.

5. Various Forms of Risk

a. Business nature risk

Different types of business contain different risks from one another. Pioneering businesses that have never been carried out have a high risk. This is due to lack of experience.

b. Geographical risk

Geographical risk is closely related to natural disasters that often occur in certain business locations. For example, floods, fires in plantation businesses, and others.

c. Political risk

Political risk also affects a business. Unclear political policies can lead to the failure of a business. Therefore, an analysis of the political stability of a region or country is sufficient to provide input on predicting the success of a business in the future.

d. Uncertainty risk

The uncertainty factor will lead to speculation and speculation will contain high risk, because things cannot be planned in advance properly.

e. Competition risk

The risk of competition can be in the form of competition between companies in the same industry. To win the competition, of course, marketing management is required that has carefully taken into account a thorough analysis of strengths and weaknesses.

6. Risk Management Measures

The steps or processes that are usually carried out in an effort to deal with a risk (risk management process) are very dependent on the basic concepts adopted. To make a good plan in avoiding the risks faced by the company, several steps must be taken, including:

a. Company Risk Identification

Risk identification can be done with the help of a checklist. In a company, a systematic method is needed to explore all aspects of a company. The methods that can be used are:

1). Risk analysis questionnaire

Risk managers need to ensure that necessary information regarding company assets and operations is not forgotten.

2). Financial reporting method

This method is done by analyzing financial statements, namely balance sheetsincome statements , and other financial records.

The risk manager can identify all risks related to the company’s assets, debts and personnel. Each estimate is analyzed in depth with regard to the possible losses that can occur from each estimate.

3). Flow map method

This method will describe the entire series of business operations starting from input to output. A checklist of potential losses is used for the operations shown in the flow map so as to determine the losses faced by the company concerned.

4). On-site inspection method

This method is used to conduct direct inspections at the place where the company’s activities are carried out. Observations of risk managers can produce results regarding how the realities on the ground are useful for risk management.

5). Conducting interactions with outsiders

External parties can be interpreted as establishing relationships with other individuals or companies. Especially those who can assist the company in tackling risks such as legal advisors, accountants, management consultants, and others.

They can assist in developing an identification of potential disadvantages.

6). Statistical records of past losses

These records can be used for performance evaluation. Performance that has the potential to cause losses needs to be monitored and refined, such as: production quality, service quality, and others.

7). Environmental analysis

This step is very necessary to find out the conditions that affect the emergence of risks such as consumers, competitors, suppliers, and others.

In analyzing each component, important considerations include: the nature of the relationship, its diversity and stability.

For example: selling products directly or indirectly, from producers directly to consumers or from producers through wholesalers, new retailers to consumers, and others.

b. Measuring risk

Measuring effort is done with the aim of knowing the relative importance and obtaining information to determine the right combination of risk management tools to deal with. Methods to measure this risk include:

1) Sensitivity method

The sensitivity method is a method of measuring the impact on exposure of the effect of the movement of a risk variable.

Measurement with this sensitivity method is widely used because this method is the easiest to calculate technically and almost all analysts and company managers have used the sensitivity method to plan decisions.

The risk variables analyzed using the sensitivity method include: interest rate risk, exchange rate risk, market risk, credit risk, and liquidity risk.

2) Volatility method

The volatility method is a method that shows the magnitude of the possible outcome around the expected yield.

Volatility that is often used is the range (range) and standard deviation.

Calculation of standard deviation can use two types of data, namely historical data and forecasted data.

3) Downside risk

Risk can have a positive or negative impact. This risk only measures the potential for adverse effects if the risk becomes a reality.

Keep in mind, there are conditions where companies can face risks that only have a positive impact, but not only a negative impact.

c. Risk control

Risk control can be done through risk control and risk financing. Risk control can be carried out by avoiding risk

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