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The Importance of a Strong Risk Management Plan

Aug 11, 2010 Matt Roesly

Former President John F. Kennedy once said, "There are risks and costs to a program of action, but they are far less than the long-range risks and costs of comfortable inaction".  When making any business decision, there are risks that must be measured. Risk management is a key element for any successful business.  Risk management starts with identifying, assessing and quantifying business risks, then taking measures to control or reduce them.  The risks are then reassessed and business decisions are made based on the remaining risk vs. reward. Having a clear understanding of all risks allows an organization to measure and prioritize them, then take the appropriate actions to reduce losses.

In order to understand the art of good risk management, one must be able to identify the different types of risks associated with each decision. Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit risk, time risk, human risk, accidents, natural causes and disasters as well as deliberate attacks from an adversary. Effective risk management reduces the opportunity for finances to be used fruitlessly, making sure that all resources are utilized efficiently while minimizing the potential for injury to employees.

Risk management provides assurance that an organization can create and implement an effective plan to prevent losses or reduce the impact if a loss occurs. A good risk management plan includes strategies and techniques for recognizing and confronting these threats, solutions for both preventing and solving bad situations, and indicates financial opportunities.

In order to reduce the risks for your business it’s imperative to have a risk management program in place with set decisioning logic, credit policies, and business rules to maintain the integrity of established performance standards.  For example, if a business approves financing terms for one consumer, but declines another, it is critical to document the reason for declination.  Making a business decision based on a protected class, such as race, is typically a discrimination risk and legal liability.  Most businesses reduce their risk for this legal liability by creating and strictly adhering to underwriting guidelines for financing. Once the decision criteria are determined, the business can use consumer data such as a credit score or criminal report to mitigate fraud and make consistent decisions.  An effective risk management practice doesn't eliminate risks. However, having an effective and operational risk management practice demonstrates that your organization is committed to loss reduction or prevention.