Few things in business are certain. Consumer preferences, weather conditions, employee productivity, and many other factors that impact business can change almost overnight. To survive in this environment of unknowns, businesses must identify and face these possibilities and problems—these risks—head on. By doing so, a business can lessen risks’ harmful effects and better achieve organizational goals.

What is risk? Risk is the possibility of loss (failure) or gain (success) inherent in conducting business. All business risks are either pure or speculative. A pure risk, such as a tornado, brings the possibility of loss or no loss, but no gain. Either a tornado hits your business, or it doesn’t. A speculative risk, on the other hand, brings the possibility of loss, no change, or gain. An example would be investing in stocks. The value of your stocks could go down, stay the same, or go up, depending on the market.

In the business world, organizations look to risk management to lessen or eliminate the impact of pure risks and to reduce the losses and increase the gains resulting from speculative risks. As a business activity, risk management involves the planning, controlling, preventing, and limiting of business losses, as well as enhancing possibilities for gain. Keep in mind that risk management doesn’t involve avoiding all risk; instead, it involves taking calculated risks that have the lowest possibility of loss and the highest possibility of gain. Risk management helps a business to be proactive, not reactive, in facing risk, and it reduces uncertainty about the future. By reducing business losses, risk management also helps to control costs, protect the business’s assets, and encourage the long-term survival and success of the firm.