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Why is Due Diligence and Risk Management Becoming So Important? The uncertain economic realities of the past couple of years has had a major effect in relation to how companies are run these days. Most of the companies that have in the past been run on the basis of projections and forecasts are finding that this is no longer practical;there seems to be renewed interest and focus on the subject of risk. Risk is a major cause of uncertainty in companies. That is why modern companies are now making concerted efforts to identify and manage risks before they begin to have impact on their business. Companies that are able to effectively manage risks are more confident in their decision making. A thorough understanding of the risks that an organization will most likely face in its operations helps it to adequately prepare against all potential challenges that may arise in the course of running the business. There are internal and external sources of risks
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External risks are those risks that an organization’s management has no direct control over. Some examples of external risks are exchange rates,political issues,interest rates among others.
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Internal risks include non-compliance to policies and procedures or breeches in information among others. The objectives of a company cannot be effectively defined without an understanding of risk management. If an organization does not pay attention to the issue of risks when deciding on its objectives,it will easily be derailed when any of the risks comes calling. It is common nowadays to find companies which operate full risk management departments. The primary role of the risk management department is to make sure the organization is well guarded against risks, to spearhead the implementation of all strategies related to risk management and to cause the rest of the team to fully support all risk management initiatives. The risk department also has the job of performing with diligence a detailed assessment of all risks and make a determination of the risks they consider to be the most critical Critical risks are the risks that can greatly impact the business negatively. Essentially,the goal of the risk management department is to ensure that the organization takes only those risks that would help it achieve its objectives while striving to control all other risks. Due diligence is another concept that is intertwined with risk management and which has also gained wide acceptance in the corporate world. Before businesses can start dealing with new parties,they normally conduct due diligence with the aim of reducing or eliminating risks. Due diligence has become quite critical as a result of a significant rise in fraud and scams in relation to the world of entrepreneurship and background checks and verification of information has become the standard before contracts can be signed;this helps manage risks. Due diligence and risk management has become very important in the way trade is carried out today.