The definition of risk varies from one field to another. Finance, economics, business, engineering, insurance or project management, take any area, they have drawn their own contextual interpretation of risks.
Let me ask you a question. What is risk to you?
You will notice in your answer that Risks is that which produces an amalgamation of feelings like fear, anxiety, anticipation and excitement, which typically occur when you face ambiguity.
Therefore, risks are equivalent to uncertainty. Uncertainty occurs when two or more results are possible, and you don’t know which one is waiting for you. Either it leads you to plan and take precautions to prevent certain consequences or walk out of an activity when it is too risky.
But are risks only negative?
We are all subjected to risks in life and business, and that is inevitable.
We have all taken our share of risks. The more you face it, the better it can turn out for you. For example, if you have an under-budget project in hand, it shows up as planning error. But in a way, it saves the cost to the company and you ensure full potential of the resources.
Risks can work out as opportunities to acquire positive and better results.
Moving Uncertainties to Known Probabilities
Risk cannot be overly shadowed by uncertainty.
As risk managers, business owners and employees, it is requisite that we deduce and evaluate the possible outcomes of a risk.
Leaving your business goals and functions to uncertain results is a definite path towards loss. It is necessary to understand the degree of profitability, opportunity or vulnerability of your organization.
Understanding the risk lets you know where your business and its functions stand, which in turn helps you create clear-cut objectives to reach your goal.
Why do we need risk measurement?
- It is not possible to know the gravity of risks unless we measure and quantify them.
- The criticality of a risk is the factor that obliges resource units and forces costs to be spent on it.
- A metric is created based on the potential and features of a risk in an organization. It lets you review success, failure or developments, and analyse the efficiency of risk control measures.
- Measuring risks provides clarity on the choice of actions and decisions that should enforce balance in the risk-reward trade-off (wherein the degree of risk, high or low, is directly proportional to the return).
Basically, risk metrics and measurements give us the option to mitigate risks as well as open our business towards risk opportunities.
Uncertainty and risks can be tied to psychological and emotional impacts. However, in the business world, we focus mainly on financial impact. The 2008 financial crisis exposed how deteriorated were the financial models and operational risk management processes and how underrated were risk metrics and measurements.
Have you developed an adequate risk metric and measurement for your business? If not, stay tuned to the CAREWeb blogs to learn “How to Build the Metrics and Measurements of Risks?”
Maher has more than 10 years of experience working in the fields of Banking and Auditing.Before joining Grant Thornton, he was an Audit manager with Deloitte & Touche specializing in Financial Institutions audits.
Maher has 1 1/2 years of experience working in Deloitte & Touche LLP – USA. He conducted Internal Audit and Due Diligence assignments for a number of well-known companies in Jordan and USA.He has also participated in implementing and testing Sarbanes Oxley requirements for SEC companies.
Since Joining GT in 2008, Maher has supervised a number of Internal Audit Assignments for well known organisations in the region
Latest posts by Maher (see all)
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