There is an element of risk in every decision we make. We are evaluating risks with the decisions we make every day. What is the best way to get to the office? Should I rent or purchase a house? Which restaurant should I choose to dine at? Every decision has a different result; every result has its own distinctive upshot or risks.
The case is similar in business. Normally, business leaders are naturally entrepreneurial. It is instinct for them to evaluate the potential and risk of every strategy or decision. Taking risks is par for the course.
Make the most out of every opportunity to prevent needless damage to your business and ensure that you make informed and structured decisions to help you reach your strategic targets. It is essential to factor in the risks accompanying the decision, not only the cost and opportunity.
Effective risk management involves distinguishing and countering the risk before a negative event happens. This safeguards the survival of your business and its success even in difficult economic times.
Step 1: Distinguish the risks.
It is important to inform yourself about the risk your particular business faces. Though it is a time investment, recognise the damage it could suffer over weeks, months and even years, if you fail to distinguish or minimise the risk.
The risk management practiced by most business owners covers tangible things, such as infrastructure and assets. The right insurance is arranged and physical security measures, such as CCTV and gates, are put in place. However, security and asset insurance are just a minor aspect of any risk management strategy by any quality business.
Think about the effect of your key management staff leaving the company. Would anybody step in to oversee the management or provide that order? What do you do in case of a data and intellectual property leak? What happens if your company reputation is trashed beyond repair?
It is in the operations and processes of a business, not in its tangible assets, where major risks are found in many small to medium enterprise. Here are some typical business risks:
- businesses disruption (e.g. technology failure or fire)
- injury to employee/s
- loss of important business knowledge
- unidentified and threatening changes in your industry
- product recalls
- harm to reputation or brand
- loss of important staff
- supply chain delays or disruption
Step 2: Gauge the level of your risks.
Risks are categorised by a business that implements sound risk management based on the following:
- The possibility of a risk incident happening (infrequent to nearly certain)
- The outcome of a risk incident happening (trivial to serious).
These items, known as risk criteria, have to be established by the company’s governance function, which is the audit committee or Board for most companies. For small enterprises, it is likely the business owner himself.
You derive a context for the risks when you set risk criteria. What is considered an acceptable risk? What risks do you consider unacceptable for your company? Using the risk criteria, you can create a combined risk rating. The rating is established according to a company’s evaluation of probability and outcome and can be graded from low to extreme. With the rating, you can find out what area you need to direct the company’s limited resources and time.
For instance, a typical risk that occurs in a company is an unexpected disruption like an earthquake. This type of risk is unlikely to happen. However, if it happens and the company has no plan of action, operations could stop due to that one event. The lack of plan to minimise the risk could have a major impact on the business.
Step 3: Handle the Risk.
When you have determined and rated the risks to your company, you can set up risk management measures to minimise the effect of the risks linked to your business decisions.
Here are some important risk management measures:
1. Elude risk
It’s impossible to escape all risks, but you can elude needless risk and its effects by keeping in mind that “prevention is better than the cure.”
2. Shift the risk
Allow another person to handle the risk. Mechanisms such as product warranties or insurance are the most common means of transferring risk.
3. Minimise risk event or its impact
You can minimise risk in many ways. In general, risk reduction is confined to an already known risk. For instance, all staff are required, as a condition of their employment, to undergo regular training on how to handle goods safely in order to minimise health and safety risk in the workplace.
4. Acknowledge the risk
There are times when the risk reduction strategy is very costly to carry out that it is best not to implement it at all. If this is the case, you have to accept in full or in part that probability and outcome of the risk of a negative event. For instance, the premium for full crop insurance may be steep and will compromise the farm’s return on investment. But insuring a portion of the farm (for example, 50%) lets you reduce some of the risk and accept part of the risk.
Don’t think that risk is all negative. Some business success has been due to risk taking. Certainly, failure can be the outcome too. However, none of the world’s most successful people achieved what they have achieved by not taking risks.
Risk management will help you get from failure to success. So, it is fine to take a risk. Just always remember to do it the right way.
PJS Accountants offers expertise in helping business owners minimise risk to their business. Based on the assessment of your business, we can design a plan to help you implement strategies to boost the potential of your business. If you need help, guidance or advice in this area, contact PJS Accountants.