Every business venture comes with associated risks. Identifying potential risks and developing a strategy for managing them are key to operating a successful business. Risk management focuses on identifying, assessing and prioritizing risks, as well as implementing strategies to deal with those risks. Businesses that take the time to identify risks are better prepared when issues arise and are able to reduce the costly effect of mistakes. Having a risk management plan and corresponding processes in place will help ensure the viability and continued growth of your business.
There are six standard categories of risk. The categories are not rigid and aspects of your business may fall into more than one category.
- Strategic: Risks associated with operating in a particular industry. These risks may include merger and acquisition activity; changes among customers or changes in demand; industry changes; and research and development.
- Compliance: Risks associated with the need to comply with laws and regulations and meet the expectations of investors and customers.
- Financial: Risks associated with financial structure, transactions and financial systems. Managing these risks may include reviewing daily financial operations including cash flow, accounts receivable, accounts payable, customer credit terms, interest rates, and foreign exchange rates.
- Operational: Risks associated with operational and administrative procedures including recruitment, supply chain management, accounting controls, IT systems, regulations and Boards of Directors and governance.
- Environmental: Risks associated with natural disasters or the effect of your company’s operations on local ecosystems.
- Political and Economic: Risks associated with the changing political and economic climate where business is being conducted. This can be in both domestic and foreign markets.
Part of the risk management process involves evaluating the significance of risk facing a company and determining whether to accept the identified risk, or take action to prevent or minimize it. Assessing risk involves considering the consequence and probability of each risk. Many businesses find that identifying the consequence and probability as high, medium or low is adequate for their needs, allowing them to direct time and money toward the most important and likely risks that may affect them.
There are four ways to manage each risk. You can accept, reduce, transfer, or eliminate it. You may decide to accept a risk because the cost of eliminating it is too high, or reduce the risk by introducing new safety measures. Transferring risk involves putting processes in place to reduce the impact of a risk on a company by sharing the risk with another party. This is often done by purchasing insurance policies. Eliminating risk may involve completely changing the way you produce your product, which in some cases is necessary.
A well-thought-out risk management plan involves putting processes, methods and tools in place to deal with the consequences of events you have identified as significant threats to your company. This could be as simple as setting money aside for cash-flow problems, equipment breakdown, or supply chain interruption. Risk management requires continuous monitoring to ensure the risks have been correctly identified and assessed and that the necessary controls are in place.