Every business carries an element of risk. Therefore, managing risks is crucial process in many organizations. Depending on the business, steps can be taken to reduce the frequency and intensity of risk. Risk management is a process or group in an organization that takes management action to reduce risk. This activity involves the process of measuring and developing strategies to manage the risk. The strategies employed include transferring the risk to another party, avoiding the risk, reducing the negative effect of risk, and accepting some or all of the consequences of a particular risk.

There are two kinds of risk management. Traditional risk management is focused on risks stemming from physical and legal causes like natural disasters, accidents, death or lawsuits. Financial risk management focuses on risks that can be managed by using traded financial instruments. Large corporations employ risk management teams while smaller corporations practice informal, if not formal, risk management techniques that are rolled into the responsibilities of operational managers. Risk managers recognize and review their organizations loss exposures including property, liability, personnel and net income. This helps promote growth through profit, continuous operation and stable earnings.

The function of risk management is to organize and carry out a plan to control or reduce the risks to which a firm is exposed. This planning involves a five-step process. The first step is to identify potential risks. The method of identifying risks may depend on the organizational culture, industry practice and compliance. Once risks have been identified, the next step is to assess the potential severity of loss and probability of occurrence. The third step is to find a potential treatment for the problem. This may involve the transfer, avoidance, reduction or retention of a potential risk. Next is to implement the plan by choosing the right method of treatment. Prior to implementation, a review and evaluation of the plan is necessary.

Initial risk management plans are never perfect. Practice, experience and actual results, will necessitate changes in the plan. Therefore, the plan should make room for flexibility in decision making. Risk management is considered an art in management circles and experience and exposure to situations helps mastering this art.