Why is risk management essential for business?

Business is a combination of activities that aim to reach specific objectives. These activities operate under a legal entity that practices its role in a particular business sector. Hence, the importance of having Risk Management can be seen in its role of understanding and identifying the risks based on the chosen legal status for the entity as well as the industry sector. Therefore, help the investor to choose the best model according to the set objectives.

On the other hand, Risk Management utilizes tools, methods and processes to build risk framework and links it to the business objectives. This linkage assists in measuring the level of risk and consequences on business objectives. In the results, business will carefully manage critical risks that have strong impact on objectives, and also keep other risks under control.

Risk can be categorized into various classifications. Theses classifications differ based on business itself and its sector and regulatory overview. However, the famous types of risks are credit, market, operation and regulatory risks.    

In a nutshell, Risk Management improves decision-making, prioritizing and planning. Moreover, it helps to achieving well-organized allocation of resources and capital, and allows anticipating the problems and minimizing amount of the firefighting.