This past year has taught us there is only so much risk that we can even predict. The coronavirus and its effects have sent many industries into unprecedented risk management scenarios for business. Even so, there have always been less extreme occurrences of external, uncontrollable risk factors for businesses. But this year has obviously set a new standard.
However, even with the current events, the companies that already had effective risk management strategies in place have found themselves much better prepared.
Managing risk is extremely important for business owners, but this task often falls by the wayside due to daily situations. Although potential risks may seem unlikely, the importance of taking the time to assess and prepare for them before they occur is crucial.
By doing this, you will be setting your company up for future success. Plus, you’ll be saving yourself a lot of time, money, and negative impacts when certain risks inevitably realize into threats. Today, we will discuss the strategies and steps to build effective risk management processes for your business.
Why Think about Risk Management for Business?
When we talk about risk management for business, we are referring to the strategies a company employs to decrease threats of risk. This encompasses the processes to identify risk factors and subsequently to analyze, assess, and control those risk factors or threats. The biggest areas in which risk factors pose threats to a company are their capital and earnings – which, of course, are major threats.
So where exactly do these threats of risk come from? Business owners know they could be from anywhere. Threats of risk can appear both internally and externally. Hence the need for a disaster recovery plan along with risk management.
Examples of internal threats are financial risk or uncertainty, legal issues, management or other errors. And in modern times, there is now an increasingly large risk factor – threats to information technology. The prevalence of IT threats is an increasing concern for businesses, as the risk level is very high – potentially losing all of your digital data.
External risks can be harder to predict. They could come from increased industry competition or a decreased public interest in your company’s sector. But as we know, they can be unforeseen circumstances such as COVID-19, natural disasters, economic fallout, etc.
The Benefits of Having a Risk Management Plan for Your Business
The main benefit of risk management should be fairly obvious. By correctly identifying, planning for, and mitigating risk factors you are certain to save your company money and protect its future in the long run. You may even be ensuring its continued existence. Unfortunately, if you get hit by a risk too hard that you are unprepared for, it could pose major issues to your company.
Other important reasons to develop an effective risk management plan include:
- creating a safe and secure environment for your staff and your customers
- improving the stability of your operations
- decreasing any legal liability you may have (which saves money)
- establishing a better understanding of your insurance needs to avoid paying for unnecessary premiums
Proactive risk management for business
The first thing all companies should consider when developing their risk management processes is implementing a proactive risk management strategy. This means being actively involved in identifying and addressing types of risks facing your company and their potential impact.
If you are too passive in this regard, it can severely limit your ability to effectively mitigate any risks. One key tenet of proactively managing your company’s risk level is not being afraid to make the important strategic decisions. As we have talk about before with strategic planning, it’s key to remain unbiased when making those decisions. This brings up the advantage of hiring an objective consultant for both strategic planning and risk management for your business.
To plan for these risks means actively and frequently considering your financial statements, asset allocation, and potential for internal risk factors. And if you see cause to worry in any of those areas, being willing to shift the status quo.
In terms of not being biased, it means being willing to consider overlooked sources of uncertainty. This is really all about being honest with yourself, your executives, your board, and your company as a whole.
Strategy for products and standards
Another area in which you can employ a proactive risk management strategy is the quality of your products and standards. Slacking on the quality of maintenance, products, and regulations put in place can be a serious risk factor.
The risks involved in failing to update and enforce high quality standards in the workplace can lead to customer dissatisfaction, workplace injuries, legal troubles, and more. You can be one step ahead of the game by ensuring your employees, contractors, suppliers, etc. are adhering to the top notch standards you should set forth. Following this strategy is an area in which you can decrease operational risk that is entirely under your own control.
Strategy for ethics
A related standard that is entirely under your own control to set is that of ethics. As we all know, the ethical standards that society is holding corporations to are climbing every day. Increasingly, customers (and investors) are supporting companies that adhere to heightened ethical standards.
Therefore, by not only raising your own ethical standards, but also ensuring that your employees have too, you will be increasing your customer support and satisfaction. Corporate social responsibility is a buzzword these days. So, make sure you are ahead of the curve in terms of your business’ ethics and social responsibility, or this area could be of potential risk for you.
Identifying Risks in Your Sector
Now let’s discuss how to employ these proactive strategies in developing a successful risk management plan for your business. The process of developing a risk management plan generally looks very similar across companies. The contents will be different, of course, but the same basic guidelines, considerations, and procedures apply to most businesses.
The first thing you always want to do when developing a risk management plan is to establish the context of the plan.
What business sector do you operate in and what is your company’s make up?
What are your general risk tolerance levels?
And what criteria will you be using to evaluate risk factors?
The next step is to actually identify the risks themselves.
We have talked about this a little already – risks can be internal or external, and can span a myriad of areas. They can be totally under your control or totally outside of your control. Part of a proactive risk management strategy is leaving no stone unturned when it comes to identifying potential risk factors. Planning for the long term means thinking of all possible risks (big and small) facing your company, rather than only focusing on bigger risks.
Next is the risk analysis portion of your risk management plan. Here, you want to move one step beyond identifying your risk factors. As such, this is the time to consider how likely it is that specific risks will occur and how detrimental they would be to your business if they did occur.
Risk assessment and respective strategies
A final step in risk management for business is assessing and evaluating your risk factors. Once you and your team have an understand of how serious and how likely each risk factor is, you need to decide what your strategy against each one will be.
Some risks may be relatively small, and so putting the time and energy into preventing them will not be worth it. Some risks, however, may be serious, and well worth putting in the necessary work to mitigate them. Each one depends on the other, of course, which is why it is so important to go through this whole process.
Once you know how much time and energy to spend on each potential risk facing your company, it is time to develop a strategy to mitigate and alleviate your most severe threats of risk. And then, as you do with every successful business plan, it is important to develop a plan to monitor your risk factors.
Monitoring check points should be clearly laid out in this portion of the plan, as risks change frequently. So, make sure you didn’t put in all this work to develop a plan, only to find that the nature of your risk factors have changed.
And lastly, make sure that you communicate and consult with your executive team and board, to make sure that everyone is on the same page when it comes to your risk management plan.
We Can Help with a Risk Management Plan for Your Business
We know it’s hard work to own a business, and we’re here to help. Our team of business financial advisory experts are ready to work with you to figure out the best plan for you.
At Saddock Advisory, we can help determine if your business is financially healthy. Get in touch with us here to find out more.