Essay on Risk management

Risk management is an essential attribute of the work in all financial markets. It is impossible to stay on the market without good money management because it is important to reduce risks on each deal for successful trading. Moreover, this will help not only to save the own money, but also to increase their quantity in several times. In such a way, the main aim of the project is to research the topic of budgeting and resource allocation in the frames of risk management.

To begin, we need to state that the search and organization of the work to reduce the risk, the art of getting and increasing income (gain, profit) in the uncertain economic situation are focused at the core of risk management. It is a truth that the ultimate goal of risk management meets the objective function of entrepreneurship. And the goal is to maximize profit at the optimum acceptable to the entrepreneur ratio of profit and risk. In such a way, risk management is a system of management which covers economic and financial relations arising in the process of the governance. Risk management includes the strategy and tactics of control, while it also greatly influences on budgeting and resource allocation (Thamhain, 2005).

Being more specific, we can mention that the process of influence on the control of the subject to the object, i.e. the process of management by itself, can be implemented only if the circulation of certain information between the managing and control subsystem occurs timely. Management process, regardless of its specific content, always involves obtaining, transmission, processing and use of information (Alviniussen, 2009). In risk management, receipt of sufficient and reliable data in terms of existing situation plays a major role, as it allows managers to take a concrete decision on the actions at risk. It can be explained by the fact that any decision is based on the information, while the quality of information is also very important. The more vague information means the acceptance of the more uncertain decision. The quality of information should be assessed during its obtaining, and not during the process of its transmission. Information is aging fast, so it should be used efficiently.

As it was previously stated, risk is an integral part of activity in any company. That is why one of the key conditions of an effective budgeting system is its global use in conjunction with the elements and procedures of risk management. According to Culp, budgeting occupies a leading position among the modern tools of effective management of the company (Culp, 2001).

As a system tool, budgeting is a set of techniques and algorithms that allow to perform the accumulation, planning and management of resources and processes required to achieve the objectives of the company, and the mechanism for monitoring and analysis of the actual activity. As an application tool, budgeting is intended to provide more effective financial and economic activities through the adaptation and optimization of management processes. The possibility of describing the future and the events which had their place in conjunction with technology and business processes in the enterprise as a whole and its individual divisions is also realized within the budget process. This makes it possible to determine how to obtain such a result, and not the other one, as well as the steps necessary to achieve the objectives. Of course, all of the above requires a qualitatively formalized methodologies, and value descriptions of resources, processes and goals.

Observing the problem of resource allocation in the frames of risk management, we can state that resources are always limited even in the largest organizations. Company management must decide how to distribute the materials, human resources and finance among the various groups for the purpose to achieve the goals of the organization in the most effective way (Dubofsky and Miller, 2003). In addition, at the stage of development of strategy of the company and determination of key budget figures, and including the component of resource allocation policy, the formation of the financial plan should be carried out, taking into account the possible impact of adverse factors, both external and internal, that is, to search for alternatives, to consider less risky options for activities with the ability to get the same income. Thus, risk management starts with the identification and evaluation of all possible threats that the company faces in its activities, while the key point is the definition of limiting external factors which include market size, scope of supply, consumer behavior and demand in budgeting. Moreover, the company management, according to its own understanding of the existing realities in the company and the ability to analyze them, is able to produce solutions of a particular quality, and therefore, it can adjust the planning mechanism and the distribution of profits, while budgeting and resource allocation is also taken into account.

In conclusion, we have researched the topic of budgeting and resource allocation in the frames of risk management, and have proved that both budgeting and resource allocation with the elements of risk management allows to predict deviations and to plan possible corrective and warning effect, if these deviations occur.