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The Usefulness of Due Diligence in Risk Management it is but a natural thing to do by business investors or lenders to conduct due diligence before staking in a potential investment or acquisition or before lending out money. 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. Although the nature may be voluntary, the process of due diligence has a legal face. Due diligence was established on the premise that the results of a careful and prudent investigation of a business entity or an individual may assist in the decision-making of investors or lenders, deliberating the obtained information to costs, benefits, and risks of their investments. 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. Due diligence can also be applied in determining the type of risks facing a business or project venture at a particular point in time. With its extensive application, due diligence can be useful in both ways – investigating the financial capacity of a business entity or individual, as well as investigating the potential risks that can arise in a business investment or lending business. The components of risk profile includes the following: 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. It is crucially important that in conducting a risk profile, it must be carried out with care and prudence so that all forms of risks (technological, sovereign, political, economic, etc) are given with much thought by the decision makers before any investment decision takes place.
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Risk management is a procedure in which all types of risks, in a business venture, is identified, assessed and prioritized or classified and when done, that signals the application of resources which will be dependent on the outcome of the risk management process, so that resources can be minimized, monitor, and controlled. The objective of risk management is to see to it that the element of uncertainty does not sidetrack the business undertaking and its goals. In an ideal risk management, a prioritization procedure is applied such 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.If You Read One Article About Companies, Read This One