What is Risk Management? 4 Tools to Increase Success in Your Life
Last Updated on by Milton Campbell
Risk is an important part of getting ahead in life. If you don’t take any risk, you will likely end up never getting ahead. But how do you know which risks are worth taking? The answer is identifying and understanding risk. The risk management tools below will help you identify and understand what you are dealing with.
When we think of risk analysis, we think of businesses or finance. But it’s important to utilize risk management in every aspect of your life.
Assessing risk properly and efficiently is the difference between success and failure. Have you ever seen somebody that just seems lucky? Often, it’s not luck. They are just good at making the right decisions and risk management has a lot to do with that.
Continue reading to learn how to use these quick and effective risk management tools to put yourself into the best situations.
Table of Contents
- What Is Risk Management?
- Types of Risk
- When Should We Use Risk Analysis?
- Quantitative Risk Analysis
- Project Risk Analysis
- Finding Risk Analysis Factors – Risk Analysis Process
- Risk Management Plan
What Is Risk Management?
Risk management is the act of identifying, analyzing, and controlling risks. These risks can be anything from physical harm to monetary losses to harm to credibility. A solid risk management plan will help you avoid the negative effects of problems.
A risk analysis factor is a problem or issue that could arise when taking a risk. These factors are used to decide if a risk is worth taking. We will discuss how to use these risk factors to determine the value of the risk later.
Risk consists of two parts: The probability of a problem occurring and the negative effects of the problem if it occurs. When you think about risk management, you should also be thinking about rewards. The reward is what can be gained if everything goes well.
Types of Risk
There are three main types of risk:
Internal risk: Internal risk is the type of risk that arises from within your organization, such as a failure to comply with government regulations. While you can’t control all external factors, you can control your own actions, so this is something you must address internally.
External risk: External risk is the type of risk that arises from outside your organization, such as natural disasters or changes in the market. These are things you cannot control, but they can have a huge impact on your company’s future if not addressed properly.
Structural risks: Structural risks are those that arise due to the structure of your company or industry itself—they aren’t necessarily caused by an individual or group’s actions or decisions within the company itself (though they may be).
When Should We Use Risk Analysis?
You should be using risk analysis in every portion of your life. On a daily basis, you face some sort of risk. Some of these risks are bigger and more important than others but the more risk analysis you perform, the more success you will see.
Quantitative Risk Analysis
Quantitive risk analysis is simply adding a numeric value to risk. For example, a particular risk has a 5 out of 10 chance of occurring and a 5 out of 10 severity. So, this risk would be assigned a value of 5.
This can be very useful if you assign a quantitative value to the reward. Using the same risk above we can look at the reward side of it. The reward has a 5 out of 10 chance of occurring. The reward is huge, so it has an 8 out of 10 impact. That would put the quantitive value for this risk at 6.5. So, in this scenario, the reward is worth the risk.
This can be very useful in step 2 of the risk analysis process we discuss later.
Project Risk Analysis
Project risk analysis is an extremely important part of the project planning process. If you don’t analyze the risks involved in any project you will be setting yourself up for failure.
Finding Risk Analysis Factors – Risk Analysis Process
- Step 1 Identify
The first step is to identify your risk. In this step, you want to gain as much information about your situation as possible. The more information you gather, the better your decision will be.
- Step 2 Risk Vs. Reward
In this step, you want to think about the pros and cons. Make a list of what pros and cons are included with the risk. Assign a probability to each pro and con. I prefer to use the 1-10 scale, because it’s easy to work with.
- Step 3 Decide
Now is the time to decide if the reward is worth the risk. Look at your pros and cons list and use that as a reference to make your decision. First, determine if there is a con that is a deal-breaker. For example, you may be thinking about doing something that could make you a millionaire. But there is a medium chance that you could lose everything. That risk may not be worth the reward.
Looking at your list, are there ways to minimize risk without giving up the reward? This can help make your decision a little easier. As for the risks that do remain, start devising plans to handle them if the problem occurs.
- Step 4 Monitor
After you decide that the risk is worth the reward, it’s time to monitor your decision. Since you have prepared at least mentally for problems, you should be ready for them. Look for warning signs that the risk isn’t working out.
What Are the Risk Management Tools?
Risk Analysis Matrix
Failure Modes and Effects Analysis (FMEA)
Risk Analysis Matrix
A risk assessment matrix is a simple tool used to help determine if a risk is worth it. As you can see from the example below, it contains a likelihood on one side and the severity of the risk on the other. For example, if something falls into the high probability/high impact category, you should avoid that.
Risk Analysis Matrix Example
A decision tree is a flow chart that uses a series of questions or choices that branch out into various outcomes. This can be useful in determining risks and the best course of action.
Decision Tree Example:
Failure Modes and Effects Analysis (FMEA)
This tool is useful in determining all the potential failures in a process or product. This will help you map out how severe the risk is and how probable it is.
The area this model will help you explore are:
- What could go wrong?
- What would cause this failure to happen?
- What will be the effects of this failure?
For more information on FEMA check out this great article.
A Bowtie Model is useful for risk management. You start with the potential risk or problem in the center of the bowtie. On the left, you put actions you can take to prevent the problem. On the right, you put actions you can do to recover if the risk or problem arises.
Risk Management Plan
Having a good strategy is vital to handling the effects of risk. Utilizing these risk analysis tools will help you determine if the risk is worth it. Also, you will have a plan on how to deal with the problems when they arise.
You can’t plan for everything but not having a plan is planning for failure.
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