5 steps to Risk Management Process (with example)

What are the 5 steps to the Risk management process?

In this article, we will discuss 5 steps of  Risk management process with examples.

Your success as a project manager or team member will depend on your ability to manage risks as efficiently as possible.

By applying a systematic risk management process, you will be able to identify the potential risk that your company may face in the future and make a pre-planned response, should the risk occur in reality.

Device a risk management plan! its must!

by identifying the possible risk  a company can prepare itself financially to irradiate or control the risk effectively.

Risk management prevents or controls the wastage of resources by identifying and prioritizing potential risks resulting in a predetermined response in advance thus reducing the financial loss of a company.

And focus on the more important task of achieving a healthy net profit amount for the year.

So, every manager must learn 5 core steps of risk management to run his/her business more smoothly.

Learn the basic risk management technique

A risk might be defined as an uncertain event that might have a negative impact on the company whether in terms of goal achievement or monetary goal of earning profit.

Now then, you have learned about a brief definition of risk. Let us discuss risk management.

Risk management is a process of developing a predetermined response to potential hazards that might be faced by your business threatening it with a financial or non-financial loss as consequences.

Sources of this risk might include competition, micro economic factors, development of new technology, legal hazards, management error and natural disasters.

Development of these predetermined response starts with the identification, assessment, and prioritization of risk by you and your team members.

Then after the identification and assessment of potential risk is completed, financial and other resources are used with proper coordination to minimize, monitor and control the probability of occurring the identified risk in reality.

The possible response to the identified risk may also be aimed at controlling the impact of the risk, should it occur in reality.

Development of possible response to the risk might involve the assessment of several legal, economic, behavioral factors.

Although there may be differences in the jargon used all risk management processes use these same basic steps discussed below.

5 basic steps in risk management process

1.   Identify the risk: You and your team will uncover the potential risk with their detailed description provided it will have an impact on your company's objective.

At this stage, you will open up a risk register, make a list of the risks for further analysis.

2.   Analysis of the risk: in this second stage you will determine the probability of occurring the risks in reality and what might be their consequences on the company. Become well understood with the nature of the risk and its likely impact on project goals and objectives.

Decide whether they are really a threat or opportunity for the company. Register the gathered data in your risk register for further analysis.

Further evaluation and ranking of the risk: at this stage, you will rank the identified risk based on their likelihood of occurrence, the severity of impact and consequences. Add the ranking in the risk register.

4.   Design response to the risk: at this stage you will set out a plan to neutralize the highest rank risk or at least to minimize its bad impact on company objectives. 

   Or if it is an opportunity, develop a strategy to get the best out of it. Come up with a risk mitigation plan, preventive measures and contingency strategy at this stage.

Monitor control and review stage: during the progression of the project, constantly monitor, if there is any sign of the identified risk being occurred in reality. 

If any such sign is sighted, implement your response plan, as designed in the risk management process.

Risk management ensures the smooth running of the business by reducing unhealthy surprises and discovering golden opportunities for the business. Problems can be tackled more efficiently as they were anticipated earlier and adequate measures were planned.

Human resources can be trained in advance to tackle the possible risks and resources can be allocated accordingly.

3 Examples of risk management process

1. Risk of customer credit: a cement wholesaler carries out the credit worthiness of its existing customers and finds that 5 of its existing customers has failed to make payment within deadline several times in six months period.

So, He identifies it as a risk and decides not to extend the invoice credit term period to these customers anymore. And do business with them only on a cash basis.

2.   Risk on capital investment: an investor finds that a tiles manufacturing firm in which he has made quite a good amount of investment has a good amount of liability in the form of debt.

He finds it as a risk thus decides to sell its share until the situation gets better.

3.   Risk of a bad reputation: a local community school used to enroll students without enrollment test. As it was relatively new.

But since it is now established, it has decided to enroll students only on the basis of enrollment test results, which it has introduced recently.

The managing community of the school believes that the enrollment test system will increase the credibility of the school amongst the parents of the potential new students.

 And will also reduce the risk of earning a bad reputation of enrolling students only for money without ensuring the enrollment of quality students.

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Written by: Dony.

Blogger and Academic writer