The primary function of any business or enterprise is to add value in the form of income to its shareholders. This function is realized by careful planning and execution of the set-out objectives of an enterprise. During this continuous process, different types of risk may appear, which may threaten to derail the achievement of the objectives of the enterprise.
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Therefore, a comprehensive framework must be put together to guarantee that all objectives are achieved within a reasonable margin, even in the events of unforeseen risks. This framework is termed Enterprise risk management (ERM).
ERM system is a complete structure that provides a set of solutions for different types and grades of risks, which gives an enterprise the ability to manage the final value it produces. It is a management plan, which tries to isolate, define, and categorize all risks that may tend to shift the outcome of a process beyond the acceptable limits.
A well-established ERM system ensures a high level of consistency in the achievement of success, which is closely related to the company’s objectives and performance indicators.
In recent years, there has been a sharp need for the application of the ERM system in companies and businesses as more stakeholders have understood the importance of such systems. ERM has been shown to increase and maintain a healthy relationship between all the stakeholders of an enterprise, including clients.
For an enterprise to enjoy all the benefits of the ERM system, all its stakeholders must understand why the system is essential, and they must also work towards the same set of aims and objectives. Some of the benefits include the following.
The following are the main aspects of risk management.
To effectively assess hazards, the administrator or manager must identify the risk, assess its severity, come up with many different management plans, choose the best plan, and continuously monitor and adjust the plan as required. The hazard management process can be used both in risk management and risk prevention.
Internal control is the process by which an enterprise monitors and ensures that all its internal procedures are working accordingly and are in line with its objectives. Internal control is used to ensure that all internal control measures are running according to the objectives of the enterprise. Both measures are used to increase the efficiency of the workflow within an enterprise.
To ensure smooth operation and prevent the likelihood of closure or penalties, enterprises usually pay a significant amount of attention to ensure that all their processes comply with regulations and rules that are prescribed by regulatory bodies.
The process of ERM involves five significant steps, which are:
Hazards, financial risks, strategic risks, and operations risks are all types of risks that can be mitigated through the ERM system.