What is Risk Management Accounting?
In terms of business accounting, risk management is the process of assessing the risks involved with a company or firm’s business practices. The overall goal of this process is to minimize or eliminate these risks. Risk can include any basic damages that happen to a company’s resources. This can be quite an extensive list. In fact, throughout the course of normal business operations most companies will encounter many different types of risk. These can include:
- Equipment breakdown or malfunction
- Employee Liability
- Product or service liability
- Defaults on loans owned by the company
- Losses on investments
Main Categories of Risk
In accounting school, students can learn that some risk is acceptable. This is a concept known as risk tolerance. Tradeoffs and opportunity costs must be weighed when deciding what types of risk should be eliminated.
To help identify acceptable risk, accounting practices call for it to be broken into categories. Some of these categories include:
- Financial: This category includes business practices that may result in financial instability. In essence, financial risk is related to management practices. Poor management practices, such as bad investments and misallocations of resources, can greatly affect the level of a company’s financial risk.
- Human Risk: This type of risk is associated with the human element of the company. This includes risks associated with the possibility of human error and judgment. It also can include how a company would be affected by incurring the loss of key employees.
- Environmental Risk: This category will include external factors that are outside the company’s control, such as natural disasters or power outages. While a company cannot control these outside influences, they can control potential damages by implementing emergency disaster plans and protocol.
- Physical Risk: In accounting, this refers to the loss of any physical resources. This includes the loss of land, buildings or equipment.
- Losses on investments
If you want to further explore the concept of risk management, enroll in an accounting degree program.
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