What are the Components of Risk?
Risk has three components. These components need to be considered separately when determining on how to manage the risk. Risk Components are:
- The event that could occur – the risk,
- The probability that the event will occur – the likelihood,
- The impact or consequence of the event if it occurs – the penalty (the price you pay).
Where to start?
Identify potential risks to your business. Most can be split into one of two categories; internal or external.
- Business owners have more control over internal risks, which come from things like day-to-day operations, strategies for the future, finances, and employees.
- External risks, like compliance, technology, and natural disasters, are much harder to identify and prepare for, but it is still important to have plans in place for these occurrences.
Do you have a plan?
The Risk Management Plan describes how you will define and manage risk on the project. This plan does not actually describe the risks and the responses, but the process and techniques you will use to define the risks and the responses.
Risks on your investments?
When a business makes an investment, in a new asset or a project, the return on that investment can be affected by several variables, most of which are not under the direct control of the business. Some of the risk comes directly from the investment, a portion from competition, some from shifts in the industry, some from changes in exchange rates and some from macroeconomic factors. A portion of this risk, however, will be eliminated by the business itself over the course of multiple investments and another portion by investors as they hold diversified portfolios.
To handle the components of risk, executives should adopt the following four-step process:
1) Identify risks
2) Assess the risks
3) Manage the risks
4) Design sharing strategy and structure the risks
Defining these points is the first-step in adopting state-of-the-art risk thinking.