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Worth of Due Diligence in Risk Management

Business investors or financial institutions normally carry out due diligence as an integral part of risk assessment of an upcoming, potential investment, acquisition or financial loaning.

The process of conducting an investigation of a business entity or of an individual before signing an agreement and carried out with prudence is known as due diligence. Due diligence is voluntary but a legal obligation. The theory behind due diligence is on the premise that the type of investigation contributes the quality of information needed by the decision makers, who are the businessmen, financial lenders, in order to discuss the risks, costs, and benefits before agreeing to sign a contract. Technical and financial components comprise the process of due diligence, such that the investigation covers studying all contracts to check on provisions of risk management and allocation or to technically study the design of a proposed project.

Another task of due diligence is assessing the risk profile or indicating all types of risks facing a business or project at a particular point in time. Due diligence is useful in both ways – for the business entity or individual who is applying for a loan or for the financial investor or lender who needs a risk profile to allocate potential risks in the contract before agreeing to the loan contract. These are salient points that are included in the coverage of a risk profile – potential causes of risk, potential consequences resulting from the risk, adequacy of the control environment operating around the risk, and adequacy of the quality and quantity of information available to monitor the control environment operating around the risk. There are various forms of risk: technological, sovereign, political, economic, etc, such that it is imperative that the risk profiling be conducted meticulously so that the awareness of all risks may be weighed down before any investment decision takes place.
The Art of Mastering Resources

Risk management covers the process of identifying, assessing, and prioritizing all identified risks, followed by a coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unforeseen events or to maximize the realization of opportunities. The objective of risk management is to see to it that the element of uncertainty does not sidetrack the business undertaking and its goals. A prioritization process is usually employed in an ideal risk management set up, such that that the risks with greatest loss or impact and greatest probability of occurring are handled first and the risks with lower probability of occurrence and lower loss are handled in descending order. Risk management also includes allocating resources which is the prime basis in establishing opportunity cost, which is an alternative cost considered in undertaking a business investment.A Quick Overlook of Resources – Your Cheatsheet