Rapid change affects every aspect of a business.
The increasing pace of digital transformation and changing business landscapes bring more significant risks and opportunities for local and international businesses.
Risk management is vital for financial managers to ensure companies’ financial success — even during uncertain times.
REGENT offers an Advanced Diploma in Financial Management that will teach you all you need to know about risk management from a financial perspective.
This article will discuss risk management, how rapid change can affect it, and why financial managers need risk management skills to succeed in their careers.
What is risk management?
Risk management involves identifying, evaluating, controlling, and overseeing potential risks to an organisation’s earnings. These threats can come from many sources, including technological issues, financial uncertainties, legal liabilities, and natural disasters.
A comprehensive risk management process and strategy will help a company consider the full scope of possible risks and plan to prevent a significant impact.
This approach to managing risks is known as enterprise risk management, which mainly focuses on anticipating and understanding risks from a business perspective.
These risks can have both positive and negative effects. Negative if the organisation can’t deal with it effectively, and positive if the company uses the risk as an opportunity to increase its value.
For example, during the global Covid pandemic, when more people needed to start working remotely, businesses used this opportunity to implement new technologies into their companies.
The Covid-19 lockdown drove South Africa’s digital transformation. While only 37% of SA companies had a digital transformation strategy before the pandemic, close to 95% of local companies recognised the value of digital transformation after the pandemic.
3 core components of risk management
Here are the most critical components of risk management.
1. Risk detection and weakness control
Managers need to be able to anticipate, predict, and observe threats — even in a rapidly changing environment. They can do this by looking at internal and external data points to assess the following:
- Risk impact
- Risk magnitude
- Risk impact duration
- Internal risk control effectiveness
- Risk adverse
- And more
2. Determining risk appetite
Companies need a systematic approach to decide which risks or opportunities are worth taking and which need to be avoided. Today, many companies take dangerous risks by only considering financial metrics and not their company objectives and society.
For example, the company may gain significant financial success from running a profitable business process without considering its values or broader societal expectations.
Thus, companies must set guidelines for taking risks that align with their strategies, capabilities, values, and more.
3. Choosing a risk-management approach
Companies need to decide how they will respond as they detect new risks. They need to be able to make decisions fast while staying within the guidelines of avoiding, controlling, or accepting each risk.
Furthermore, they also need to decide the roles and responsibilities of the management team and how to mitigate these risks in the best possible way.
How does rapid change affect risk management in business?
Rapid change significantly impacts risk management in companies in several ways. Here are a few examples:
New risks arise
As the corporate environment rapidly evolves, new risks not previously addressed or detected may appear.
For instance, the move to remote work during the COVID-19 epidemic increased cybersecurity vulnerabilities as staff members used their homes as access points to company networks.
As a result, businesses were being attacked online and had to find ways to protect their online real estate, such as their websites and data, against cyber criminals.
Shorter planning time frames
When change occurs fast, it leaves a brief period for effective risk management. This is especially true with the rapid digital transformation the world is going through. Every day, there seems to be a new tool or platform that poses unique risks.
As a result, businesses may be forced to revise their long-term risk-management strategies more frequently to ensure they remain competitive in a fast-moving business environment.
Traditional risks evolve
Whereas businesses were required to manage certain aspects, such as their reputation risks, in more traditional manners in the past, the digital transformation and growth of social media platforms have made this more complicated.
Businesses are now expected to monitor online platforms and manage their reputation online and offline to ensure they maintain an excellent public image.
Financial risks increase
The financial department often suffers in times of drastic change when businesses go through several challenges.
When certain risks arise, companies must invest in services, tools, and platforms to evade these risks. As a result, they often need to pay vast sums of money that they didn’t initially plan on.
Why do financial managers need risk management skills?
Risk management is essential for students thinking of studying financial management. This is because, as mentioned above, changes in the business environment and natural disasters can severely impact a company’s spending.
Financial managers must have risk management skills to adapt their processes and decision-making frameworks to look after the company’s financial well-being.
Risk management skills will also help them identify possible financial opportunities they can take advantage of. Some of the most critical risk management skills financial managers need include:
- Knowledge and understanding of regulations
- Problem-solving abilities
- Strategic thinking skills
- Analytical skills
- Ability to work well under pressure
- And more
Discover the top skills required for the 21st Century workplace.
Study risk management with REGENT
Are you a financial professional looking to build critical risk management skills to further develop your career? After reading this article, you now understand the importance of effective risk management to achieve financial success for any organisation.
By taking REGENT’s Advanced Diploma in Financial Management, you will learn all the risk management skills you need to make better decisions and become a highly sought-after employee.