RISK MANAGEMENT

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