Business Risk Management: A Proactive Approach

Risk management is a process that helps business owners identify and respond to risks in business. It deals with how businesses manage risk, but first, business owners must identify all the potential risks that can affect their organizations.

Through risk management practices, businesses can protect themselves, their employees, and their customers from the various risks involved with operating a company.

Why is risk management important for businesses?

Managing risk helps business leaders identify potential hazards for their business that can affect everything from their reputation to their finances.

Common threats to businesses include financial troubles, legal issues, management errors, accidents, and even something as unpredictable as a natural disaster. Any unforeseen event is a business risk and can cost you money and customers.

Developing an effective risk management plan, or contingency planning, minimizes and attempts to control these risks and their impacts. A proper risk management strategy ensures that you know how to effectively mitigate risks, even when they happen unexpectedly.

The different types of risk

Knowing the types of business risk is the first step in developing a risk management plan to support your business and prevent disasters. The most common business risks include the following:

Financial risk

Financial risks are when your company's finances are put in danger. This could mean you’ve taken out massive amounts of debt to implement a rolling budget but didn’t perform debt management to ensure you could repay those obligations.

Market changes can also result in financial risks and losses that affect your operating ability. For instance, a business can use predictive analytics to forecast future sales. However, a change in the market and demand for your product can threaten the business because you may have already allocated resources based on sales projections.

Operational risk

Operational risks are those that threaten your ability to operate efficiently. For instance, high overhead can contribute to operational risk when you’re paying too many people to work when there’s not enough work to be done.

Internal factors like errors made by employees can threaten business operations in several ways, while external factors like chargeback fraud impact your physical assets.

Strategic risk

Every business has an overarching business strategy. The more competitive your strategy, the more potential risk you take on. This is called strategic risk.

For example, if you want to develop a new product, you’re taking on a risk because you don’t know whether it’ll perform in the market until you do market research, which costs time and money.

Compliance risk

Compliance risk refers to the laws that govern businesses and can occur when a company violates those laws and industry regulations. For instance, if your workplace doesn’t have safety equipment for employees, you could be in violation of certain regulations.

Compliance risks can also result in financial and reputational damage. If your employees don’t follow government safety regulations, you can be fined, and word may spread about how you knowingly put your employees at risk, damaging your business's reputation.

Reputational risk

Reputational risk is any risk that can ultimately affect your reputation or how the public views your business. Unfortunately, it can be difficult to pinpoint all the possible reputational risks in a business.

However, you set certain standards and expectations with customers by telling them about the values of your business. Not following through on those promises is a serious reputational risk.

For example, a clothing company might claim that sustainability is important to them, but when customers receive their deliveries, they don’t receive sustainable packaging or products. No business wants bad press, so you should always be aware of how the decisions you make can affect your reputation.

The risk management process requires business owners to identify risks before they can try to prevent them. While it may be impossible to identify all the risks your business is susceptible to, you should be able to list a few of the risks you can think of off the top of your head.

Risk management is a continuous process. Every time you make an important decision, you will want to run a risk assessment to determine if it’s the right move for your business.

The risk management process consists of three key steps:

Risk identification

Risk identification is the process of identifying business risks that could be potentially harmful. Your business may not be at risk for these things right now, but it might be in the future, so you should consider all possibilities.

Consider the various types of risk and the type of effects they can have on your business. Your list should be updated regularly, especially if you make significant changes like releasing a new product or working with a new partner.

Risk analysis

Once you have your list of identified risks, you can determine how these risks can affect your business and how likely that is to happen. This allows you to prioritize risks, starting with those with the most immediate and damaging impacts.

You can also use business intelligence tools to create a visual representation of your risks based on internal and external factors.

Risk mitigation

Risk mitigation is the process of evaluating risks and determining how you can prevent or control them. There are several techniques businesses can use to determine their responses to risk. Risk mitigation is your ultimate plan for how to manage risk.

Once you’ve identified what those risks are and how they can affect your business, you can devise a strategic plan for handling risk and determining whether it’s worth taking on certain levels of risk.

Risk mitigation is one of the most important steps in a risk management program because it allows you to identify a plan of action for controlling risk. There are several ways you can mitigate risk within your business, such as:

Risk avoidance

Risk avoidance doesn’t mean ignoring the risk and pretending it doesn’t exist. Instead, risk avoidance is eliminating the risk altogether. This may mean avoiding certain business activities that can put you and your employees at risk.

Risk reduction

On the other hand, you can also mitigate risk by taking actions to control or limit it through risk reduction measures.

Every online business is at risk of cyber theft. Savvy hackers can steal your customer’s sensitive information. However, with robust IT and cybersecurity systems in place, you can mitigate that risk to protect customer data.

Similarly, you can reduce risk in the workplace by properly training your employees. You should train employees on how to use your sales CRM to conduct business to prevent risks associated with unhappy customers. You should also teach employees how to properly use equipment and ensure they follow the safety regulations.

Risk transfer

Risk transfer allows you to transfer risk to a third party. When you purchase a home, you get homeowners insurance to reduce your losses in case of a natural disaster or theft. The same works for businesses.

Business insurance can cover theft, damage, lawsuits, and lost business income, allowing business owners to transfer a few of their risks to another party — the insurance company.

Risk acceptance

All business owners accept some level of risk because there’s no other option. While you can do all the market research in the world, you won’t know if your business idea will succeed until you make it happen.

For instance, you may decide to start an e-commerce business only to find out that it’s much more challenging to succeed than you originally thought. At the same time, any unforeseen event can completely disrupt a business. Your employees might get sick at the same time, or the economy will force demand to drop.

All businesses have to accept that there are some risks that can’t be shared, transferred, or easily mitigated.

Risk sharing

Risk sharing shares risk among the stakeholders in an organization or within the business itself. A business owner might form a corporation to mitigate personal risk and losses by separating themselves from the business entity. A business can also share risk among investors, allowing all of them to pool their money together. If the business fails, no one person accepts all the risks.

Prioritize risk management to ensure successful business operations

Effective risk management programs can help you to predict and prepare for risks that can harm your business’ finances, reputation, and success. Prioritizing risk management allows you to identify potential risks and find new ways to mitigate them before they cause serious problems.

While there are many different kinds of risk in business, one type you should always prioritize is the risk involved with customers. Customers are the most important aspect of your business, so finding new and effective ways to communicate with them can improve your reputation and mitigate risks involved in sales, customer service, and marketing.

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