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Why is Risk Management important?

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Written by   16
3 months ago

“A gain without risk, experience without danger, being rewarded without working, is just as impossible as living without being born.”

A.P. Gouthey

Developments at the end of last year showed that companies were not prepared for risk management. As every entrepreneur knows, there is no profit without risk. However, it is often forgotten that failing to "manage risk" is tantamount to not doing your job and gambling.

For a good risk management, first of all, potential risks must be identified. Conducting a study on the basis of risk categories in risk determination prevents important risk areas from being forgotten. For example, each company must determine its risks in terms of inputs, production processes, market conditions, financial markets, illegality, changes in laws and supervisory authorities, and taxation.

The second step is to evaluate the probability of realization of the identified risks and the costs they will impose on the institution in case of realization. In the light of this evaluation, the risks are grouped and the measures to be taken are determined. For example, while risks with high potential but low probability of realization are managed through different financing methods such as insurance or leasing, investments may be preferred to reduce risks with low potential impact and high probability of realization.

At the stage of risk assessment, different techniques are used according to the nature of the risk. For example, in an environment of negligible uncertainty, bringing cash flows to their present value and sensitivity analyzes are preferred for project evaluations. In cases where there is a limited number of possibilities, scenario analysis and decision tree methods are preferred. Simulation studies and option theory are used when uncertainties and their consequences can be modeled with certain distributions.

It is necessary to pay attention to certain principles in risk management. It is beneficial to adopt transparency as a management approach in order to reduce risk. The most important factor in risk management is not the techniques used, but the experience of those assessing the risk. Therefore, working with experienced managers and consultants should be preferred. One of the most important principles in risk management is to understand well what you do not know. It is necessary to remember that every technique and model is based on assumptions and to question these assumptions. It is necessary to pay attention to the establishment of the business in a structure that will undertake different risks in a balanced way. For example, Demirbank's problem was that it built its portfolio heavily on treasury bills. It is also important to ensure regular control with a disciplined approach in risk management and control mechanisms. Regular measurement and monitoring of returns along with risks is essential for good management.

In summary, risk management is not about not taking risks. In fact, not taking any risks is the biggest risk because it means not doing business. Risk management is to establish systems that will ensure that the risks to be taken are taken consciously and are followed regularly.

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Written by   16
3 months ago
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