Risk is just the possibility of something bad happening. It involves uncertainty regarding the possible harm or adverse impact of a decision on things we value, such as our health, wealth, property, or the environment. Risk is an important fragment in different avenues of life involving our decisions, activities, business, finance, operations and other domains. With the concept of risk, we are essentially assessing the probability of different outcomes and comprehending the potential impacts and then make an informed decision while trying out appropriate measures to mitigate it.
We quantify risk by considering the historical data and the results produced from it. The measure generally associated with risk specially while calculating financial risk is ‘standard deviation’. In statistics, standard deviation is used to determine how deviated the data is from mean, similarly we use it in finance to measure how much an asset like an investment is moving from its average return.
We are always taking risks even with the smallest actions in our lives like using fire or electricity to cook food or crossing a busy street. In an organisation, risk can arise from both he internal or external factors. It is said that the higher risk you take, the more successful the outcome could be. Risk is often associated with the amount of returns that it produces. There could be higher potential losses but the rewards are also higher if it works out. However, risk involves both threats and opportunities and it is up to us how to balance both so as to mitigate extreme losses.
When we identify, assess or mitigate risks to minimise its impact or likelihood of occurrence is what we call risk management. It’s a proactive approach which helps to prepare for potential and undetermined risks. Implementing the risk management practices will help the individuals as well as businesses on a small and larger scale. It would help in following ways:
- Making decisions aligning with the organisational goals
- Reduction in Financial losses
- Lesser operational challenges during adverse times
- Avoiding legal and regulatory consequences
- Exploring new opportunities
- Provides competitive advantage
- Builds more trust amongst the stakeholders adding to reputational advantage
- Reduces uncertainty and provided leverage during unforeseen circumstances or events
– Team Risk Unplugged