Risk Management

Risk management is used in our everyday lives, as well as in business. Every day we take risks. These risks can include having a car accident, falling, or as simple as seeing someone we dislike. The definition of a risk is "the possibility of suffering harm or loss" ("Risk," 2004). For every action there is a consequence, which is either negative or positive. In our daily lives, we all act in certain ways, but sometimes we ignore the risk factor for many different reasons. A risk can be calling in to work too many times, and then the consequence could be losing your job because of your unreliability. Risk is something that is important for all of us to ponder on in our lives at one time or another just as it is important in the everyday business world.

Risk management is "the process of analyzing exposure to risk and determining how to best handle such exposure" (Web Finance Inc., 2007). Businesses cannot survive without risk management. Businesses face a variety of risks: credit risk, operational risk, and market risk (Marphatia & Tiwari, n.d.). "Credit risk is risk resulting from uncertainty in a counterparty's ability or willingness to meet its contractual obligations" (Marphatia & Tiwari, n.d.). Another way to explain credit risk is by saying that a business has a huge client which is a big percentage of the company's income. If they do not pay on time, the company suffers a loss because they are then not able to sustain themselves. Operational risk is the risk of human and technological failure (Marphatia & Tiwari, n.d.). Operational risk can be described as the risk of your computer failing at work and then the company will suffer a loss. "Market risk is the financial risk of uncertainty in the future market value of a portfolio of assets and/or liabilities" (Marphatia & Tiwari, n.d.).

In order for any business to stay on top, they must research the risks, and then find a way to reduce the chance of the risk happening, and also how to reduce the effects if the risk does occur (Marphatia & Tiwari, n.d.).Risk management assists companies to make the right decisions without detrimental results that may have occurred without the proper research. In order to maximize profitability, any business must consider and evaluate risk and return (Gitman, 2006, p. 226). It has been said many times, the greater the risk the greater the return. Without proper evaluation of risk and return businesses will make the wrong decisions, which will harm the company in both the long run and short run. Therefore it is imperative for businesses to have a risk management program.

References

Gitman, L.J. (2006). Principles of managerial finance (11^th ed). Boston, Massachusetts: Pearson Addison Wesley

Marphatia, A.C. & Tiwari, N.T. (n.d.) Risk management in the financial services industry: An overview. Retrieved February 26, 2007, from TCS Web site: http://www.tcs.com/0_whitepapers/htdocs/risk_management_fsg.pdf

Risk. (2004). In American Heritage Dictionary of the English Language, 4^th ed [CD-ROM]. Boston: Houghton Mifflin Company.

Web Finance Inc. (2007). Risk management. Retrieved February 26, 2007, from Investor Words Web site: http://www.investorwords.com/4304/risk_management.html