Risk management system in profit making organisation
The Profit making organization has primary objective to earn profit and profit is the difference between revenue and total cost. If cost is higher than revenue, loss is incurred and vice verse Some external forces affect the revenue to be decreased and cost to be increased. These forces are known as Risks.
‘’Risk is a condition in which there exist quantifiable dispersion in the possible result of any activity’’
Organisation has tried to manage these external forces (Risk) to achieve its objective. Risk management system is not a simple task and not all organisations manage risk in same respect. Risk management system is depending on nature and size of business. Because High objectives have high risk and low objectives have low risk, simply speaking risk is directly proportional to objective.
Organisational’s risks are managed by internal control systems; High risk needs to manage by strong internal control systems, so design and implementation of internal control systems is dependant on risks. In past some wrong techniques were used to manage risk by implementing non-value added activities. Which result heavy loss to businessman.
For example some organizations have low risk but managed by high internal control systems that result high cost and decrease the profit. And some organizations have high risk but was managed these risk by weak internal control system, risks was not properly managed and affect the profit. Both techniques to manage risks were disaster for businessman.
Let’s have to understand by Illustration;
ABC Co. has worth $15million and annual profit of $5million and XYZ co. has worth $5million and annual profit $1million. Both companies installed same security alarm system that has cost $1million to manage risks faced by company. Security alarm system is beneficial for ABC but not suitable for XYZ because XYZ may go towards loss by implementing this system.
New approach to manage the risk is that ‘’Risk judge internal control system required by the organization’’
Internal control system should establish according to the risk. It is necessary for the companies to take risk because there is a relationship between the risk and return. And there is direct relationship between risk and return (directly proportionate to each other).