Managing risk is something all businesses must wrestle with at some point or other. Effective controls can help any business move forward with confidence when all efforts have been made to identify, assess and mitigate risk.
Further, future controls of highlighting risks further down the line will help establish your company as one that cares about business, profit, and, above all, people. Mitigating risk is an ongoing strategy from the initial identification to overall reduction.
It can be hard to identify risk, and all businesses are unique when it comes to this. But whatever the risks are, all can be dealt with by your company using robust measurements and strategies.
What is Risk Management?
There isn’t a sector, or indeed, business on Earth that doesn’t come with a certain degree of risk. Risk can be internal, external, or both. And effective strategies are needed to avoid the impact any risks can have on your business. This could be as simple as highlighting cyber issues.
Yet even local self-storage can help avoid the risks associated with data loss, such as theft, fire or flooding. Risk comes from various sources, and the key is identifying these early.
Why You Need It
There are certain “red flags” when it comes to any business process, and some are glaring and obvious. However, you cannot hope to identify all associated risks without an active and effective way of spotting and managing risks. Some of the initial steps include the following:
Assessing each risk after identification helps determine how likely it is.
You next need to implement controls for responding to any of the risks.
Risk management is an ongoing process that needs to be tracked.
A continuous cycle of assessment, control and management helps reduce risk.
A solid risk program relies on the company’s approach to where it comes from and understanding the impact it can have. From there, a risk register allows you to prioritise and manage risks as they are ready for review in an effort to streamline internal business processes.
Managing Risk Today
Around 67% of companies don’t have an adequate Enterprise Risk Management (ERM) system to deal with anything that can transpire. It first helps to understand the three basic types of risk. Preventable risks are risks that can arise from within the business but are controllable. Strategy risks are risks you know come with your business, such as losing money on an investment. External risks are issues arising from outside the business over which you have no control.
Feedback-Based Risk Management
It is possible to develop a risk strategy based on feedback. Known as theory validation, the risk is identified by gathering data from various sources. These include surveys, questionnaires and other methods of collecting data. This type of risk management is excellent for consumer-facing systems, such as assessing issues with products. However, implementing this into a strategy is only as good as the sources it comes from, which need to be relevant throughout the process.
Planning for contingencies
It always helps to have a plan in life and business. A fallback when risk becomes a reality can help you stay afloat and continue to do business. Contingency planning, therefore, becomes a valuable part of any risk mitigation strategy. For instance, there needs to be a power plan in place for backing up company data during a power outage. Depending on where you live, this is more or less likely to happen. But never impossible. All staff also need to know what to do.
Measures against risk occurring
Whether something is less or more likely to happen is pretty much irrelevant because any risk is possible, even at a near-zero level. Risk is assessed against likelihood and impact using multiple strategies. Risk avoidance means you completely stay away from the activity that causes the issue. Reduction mitigation is an approach that makes efforts to prevent an issue from occurring. You can also transfer risk to a third party, such as your insurance service.
Effective risk reduction
You can almost never prevent any risk from occurring, but a solid and reliable risk reduction model can help your business keep the chances as low as possible. Most risk reduction methods use a practical plan to figure out and work against possible risks to the business:
First, it helps to accept that there are risks involved with your business model.
Avoidance means staying away from the activity that comes with the risk itself.
Risk can be shared between parties such as shareholders with good governance.
You can dedicate extra resources and staff to buffer any incoming risk effectively.
Models can be run to test the effects of any identified risks on your business.
Risk quantification helps to establish a clear picture of the financial impact.
Digital tools and technologies can help evaluate, control and reduce business risk.
Knowing where the risk comes from and the chances of it occurring helps figure out ways to overwhelmingly reduce any issues. This is enhanced by running subsequent models for measuring the impact. Today, there are various digital tools and systems for accuracy.
Managing supply chain risks
The last few years have highlighted just how crucial a solid and reliable supply chain is to a modern business. COVID-19 hit us during one of the worst supply chain disasters of the 21st century, which only served to compound the issues. Today, we are still recovering from the supply chain issues between 2019 and 2022. The supply chain is almost always a high-risk factor for most businesses, yet there are some actions you can take to reduce some of the risk.
diverse suppliers and contractors
Not putting all of your eggs into one basket is a great start when addressing supply chain risk. A diverse range of suppliers means you can mitigate the risks of not being able to source products and services from your usual or preferred supplier. It may come with a financial or quality cost, but sourcing from multiple contractors will help you stay productive, even when times are bad. Because of this, around 70% of CFOs from one survey indicate they now source from a range.
long-term contracts
Not all supply chain risks are associated with not being able to source a product or service but with fluctuating costs. Of course, these costs are linked with supply in the first place. However, some suppliers can take advantage of the issues when they arise.
Signing longer-term contracts can help lock prices in place so you aren’t hit with shocks and surprises when issues occur. This mitigates some of the financial risks that come with unpredictable supply chain problems.
How Managing Risk Enhances Business
Being aware of risk means you can protect your business against it. Each sector or business type comes with its own risk factors, which can be unique to your niche or company. Investing in risk, however, can actually help you financially with a good return on investment. As part of a strategic risk, you can calculate risk ROI based on potential savings. As a quick example, risk ROI divides savings by the cost of mitigation multiplied by 100 to work out the percentage value:
Savings ($400,000) / Investment ($100,000) x 100 = $300,000
Why Review a Risk Strategy?
Coming up with a risk strategy has many advantages, and just being aware that there are risks means you get off to a great start. There are also short and long-term benefits that help enhance your business model and links with other branches of an organisation, for example:
Risk management can help you achieve better strategic goals as part of your plan.
It can become part of a company culture that reduces risk over time.
A well-thought-out strategy helps decrease the number of risks moving forward.
Identifying and understanding risk helps you make better decisions.
Forward business plans can be modelled around some of the risks associated with the sector, and a strategy helps you avoid them. Some risks can become part of company culture in an effort to understand them throughout the hierarchy, leading to better decisions moving forward.
Future-Proofing Your Risk
Most businesses make efforts to anticipate how future events will affect the company. With this comes the opportunity to minimise the impact of future risk on your business. For example, a contingency plan will help you avoid supply chain issues, financial issues or natural disasters. Ongoing innovation and adaptation are part of this, and any risk plan includes some variations of these that pertain uniquely to your company. But any data you use must be very accurate.
Summary
All businesses need to assess current or future problems and implement controls for managing risk in their sector. Yet, although risk can come from within and without, most can be predicted, avoided or included as part of a business plan.
Finding risk can be as simple as asking for feedback data, but assessment depends on the type of risk associated with your business. This should include contingencies for things such as financial losses or reduced supply chain issues.
