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Why is risk management important for organizations?

Risk Management has taken more importance in these challenge-filled pandemic times.   Because of a lot of uncertainty involved, businesses want to be more confident about future prospects and the outcome of their decisions.

Risk management refers to identifying, analyzing, and responding to immediate and future risks that a business can face.  It also helps to avoid or minimize the risks by acting proactively, thereby reducing the force of any negative impact.  In such insecure times, Risk Management helps the business by identifying potential risks and how to deal with them. 

The importance of risk management in these troubled times cannot be understated.  Risk management is an essential process of a business.  Hence proper steps are taken to do it systematically. Hence,  a Risk Management analysis involves these steps:

  • Identifying the hazards and risks
  • Minimizing the risks by taking adequate protection
  • Planning
  • Reviewing existing systems and making improvements
  • Recording the details and reviewing them

Reading the above steps will give some idea about the importance of conducting proper risk management. To further understand why risk management is important for organizations, consider a few reasons mentioned below.

  1. Reduce Uncertainty:  For a new business owner, it is essential to understand what challenges the business will face in the coming days. This will help reduce some of the uncertainty. This leads to the next importance that is.
  2. Planning:  A successful business foresees the risks and counteracts them with planning.  Unforeseen events can damage the business prospects.  But once a potential risk is identified, a business is better positioned to arrange the counter-measures, change strategies and take suitable precautions.  For example, Risk Management may identify new items and equipment needed for the business to run safely.  Applying these changes will benefit the company in the long run.
  3. Reduce Costs:  Because the business has identified the potential risks and taken the needy precautions, it can help reduce the costs and losses when the actual events occur.  The business is better prepared to face the negative turn of events, thereby preventing huge losses and loss of productivity time.  Accidents can cause losses and give rise to fines and compensation pay-outs.  Not to mention the rise in insurance costs. A sound Risk Management helps keep all these expenses in control without causing undue impact.
  4. Goodwill:   A proper Risk Management, when accomplished, reinforces faith in the business.  The larger the business, the more risks are involved and hence gives rise to more responsibility. However, Risk Management instills confidence in the employees and the owners that business is meant to succeed.   It will boost morale when times are complicated because the business is reliable and continues to deliver.  So, preparedness for eventual risks instills confidence in the Management’s abilities.  The work culture is improved, and staff turnover is reduced.  By taking precautions to stop a hazard from becoming a reality, the company provides peace of mind and reassures all concerned. 
  5. Legal requirement: Risk Management is a legal requirement that needs to be complied with in many countries. Non-compliance will attract heavy fines and penalties.

While discussing Risk Management, it is also good to talk about HIPAA (The Health Insurance Portability and Accountability Act 1996) risk management.   Because of the prevalence of hackers, patient’s health data can be breached. This, in turn, will result in levying heavy fines on the health providers and lead to a negative impact on patients.

Since the patients’ records are primarily stored electronically (ePHI – electronic patient health information), there is a particular risk involved. Hence the HIPAA Rule has specific mandates which health care providers and other institutions must follow. HIPAA risk assessment aims to identify the potential risks of ePHI that may arise from within and outside the organization. Once the risks have been identified, the Management must take reasonable and appropriate measures to cover those risks.  These preventive measures may include taking the backup of data, enhancing password protection, or using encryption. In short, HIPAA risk management helps to avoid data breaches, safeguard patient information, and save money by avoiding non-compliance fines and penalties. 


In many countries risk management is an essential component of health and safety standards.  It protects employees, customers, and others involved in the business. Conducting risk management might seem like a hassle initially, but it will save time and money in the long run.  A business will bear the losses, avoid lawsuits, and remain in business with a good Risk Management in place.  While real risks cannot be avoided, Risk Management reinforces the belief that proper preventive measures have been taken.

Risk Assessment is a primary tool for Management. It helps in decision making, and is financially beneficial. Most importantly, it is morally and ethically right to do Risk assessments as it prevents injuries and accidents, thereby safeguarding the lives and property in the long run.

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