In contemporary organizations, different factors impinge on the operations of the business which significantly impact and influence their overall performance and financial condition. Internal factors, such as human resources, assets of the organization, and procedures and policies could immediately be addressed. On the other hand, external and environmental factors that impinge of the organization’s performance include both opportunities, which should be tapped; and threats or risks, which should be appropriately managed. The term ‘risk management’ has been explicitly defined as the “practice of identifying potential risks in advance, analyzing them and taking precautionary steps to reduce/curb the risk” . The ability of management to assume a proactive stance in addressing and managing these risks would be instrumental in the way the organization would meet identified goals, especially in terms of meeting financial targets.
There are different types of risks that organizations normally encounter, including credit risk, investment risks, operational risks, as well as market risks . Risk management is therefore important to enable the organization to prepare, anticipate and be able to design appropriate strategies which would mitigate the identified risks. Doing so would entail functions such as planning, organizing, directing and controlling factors that could be contributory to increasing preponderance to the risks. Businesses are also noted to be able to face calculated risks since some opportunities with higher risks are the ones that also provide greater returns. Thus, through risk management, decision makers are able to balance risk and returns to weigh alternatives and to provide them with the most viable option that would maximize their resources and minimize costs related to these endeavors.
For instance, one type of risk that is mentioned is investment risk. According to the Financial Industry Regulatory Authority (FINRA), there are two types of risks: (1) the risk of losing money (investment risk); and (2) risk of losing buyer power (inflation risk). Under investment risk, there are again two noted classifications: systematic and nonsystematic risk . Systematic risk is defined as the market risk or that which affects the whole economy. On the other hand, nonsystematic risk was described as affecting “affects a much smaller number of companies or investments and is associated with investing in a particular product, company, or industry sector” (FINRA: Nonsystematic par. 1).
Works Cited
FINRA. "Managing Investment Risk." 2013. finra.org. http://www.finra.org/Investors/SmartInvesting/AdvancedInvesting/ManagingInvestmentRisk/. 5 December 2013.
Risk Management Association. "Enterprise Risk." 2011. rmahq.org. http://www.rmahq.org/risk-management. 5 December 2013.
Times Internet Limited. "Definition of 'Risk Management'." 2013. economictimes.indiatimes.com. http://economictimes.indiatimes.com/definition/risk-management. 5 December 2013.
