Risk Control Definition
Risk control basically means assessing and managing the affairs of the business in a manner which detects and prevents the business from unnecessary calamities such as hazards, unnecessary losses, etc. that may occur
To analyze the risk associated with the business entity, these following steps should be taken:
- The primary step is the analysis of the business environment in which the business operates.
- After that, analyze the possible circumstances which could affect the business activities, whether they are adverse or favorable, called risks.
- Then finding out the measures which could be applied to control or it could not be prevented or controlled fully then to minimize the effect thereof.
How Does it Work?
As explained above, the timely analysis of all the possible circumstances which could affect the business activities, the enterprise could easily manage the affairs of the business in such a manner so that the return to the shareholders of the company would be maximized. The primary step for every business to succeed in the long run is to assess the risk and not only evaluate the risk is sufficient. The primary step is to implement such measures that could control such risks.
Example of Risk Control
- Suppose ABC Inc. and XYZ Inc. have the same production unit in which they produce units of mobiles. ABC Inc. has appropriately appointed and has assigned the job to the controlling department to assess the risks associated with the business activities. In contrast, XYZ Inc. does not have any such type of department and manages such risks as and when they occur.
- The controlling department of ABC Inc. has informed the decision-making committee about the event that there may occur a shortage of raw material which they are using in their production units in the next 20 days for a month, which could result in a total loss of $50,000,000 to the enterprise on the other hand XYZ Inc. does not have any such team.
- After analyzing the basis, ABC Inc. has created sufficient stock for such a period so that the production process would not be interrupted. Still, XYZ Inc., in this situation, does not have any such idea. Now, in this situation, by analyzing and controlling or by proper planning, ABC Inc. has saved a notional loss of $50,000,000, which the enterprise would suffer. On the other hand, the production process of XYZ Inc. would not even have any idea about such a situation and has incurred a massive loss because of such risks, which could have been controlled and minimized.
Strategies for Risk Control
The next step after analyzing the risks of business is to apply such measures which control such risks which are as follows:
- Is to avoid such a situation or process which could ultimately lead to such a risk situation known as an avoidance method.
- Where all the risks associated could not be controlled, then in that situation, the activities of the business should be managed and operated at such a level where the effect should be minimized, known as the eliminating method.
- When the risks could not be controlled or managed, then in that situation, such activity can also be outsourced to someone and could be stopped in the house to manage the risk known as the outsourcing method.
- The least used method operates as it is, which means the business prepares itself to manage such situations as and when they occur, whether they result in a profit or the loss.
How Does Risk Control Benefit Business?
- By providing maximize returns to the shareholders of the company by controlling such risks, the enterprise creates or enjoys the value edition in the market share of the enterprise.
- If an enterprise has a good team for analyzing and controlling the effects of risks, then it could easily sustain in the adverse situation which may occur in the future and could minimize the losses that could be happened because of such risks.
Every business has some risks in which an entity operates apart from those; there are some natural risks that cannot be controlled but can be prevented to minimize effects thereupon. Properly analyzing the risks and make appropriate policies concerning such risks helps an entity to achieve its motto and goals, which indirectly improves the market value and sustains its viability in the event of any such risk and helps in the easy functioning of the business. It was seen that in big or reputed organizations that are globally established have managed a good team concerning the analysis and controlling such risks.
Risk Control vs. Risk Management
- Risk control is the first stage as compared to risk management. In other words, when the risks associated with which the business operates cannot be fully controlled after that comes the risk management to minimize the impact of such risks and maximize the output and profits of the business.
- Risk control is an integral part of risk management. In other words, risk management has a broader scope as compared to risk control.
To conclude, it plays a vital role in the success of any business enterprise, which means to achieve the goals and objectives of the business and run the business activities as planned, one must have to analyze the impact of various kind of risks and prevent or minimize the effect of such risks on the business. It can be easily said that whether the enterprise is of any level, the proper assessment and management of risks associated with the business activities is also a significant step to help any business enterprise to achieve their objective.
This has been a guide to What is Risk Control and its definition. Here we discuss how risk control benefits business along with an example and strategies. You may learn more about Financing from the following articles –