Risk Management for Businesses
Every business comes with its own set of challenges, but a common opportunity and threat is risk that transcends all industry boundaries and impacts business development and growth. At their inception, businesses have to navigate the hurdles of participating in an economy which can be anticipated to a degree such as currency fluctuations or unprecedented such as the COVID 19 pandemic so they can eventually switch from survival mode to growth mode, and risk management is key to making that switch. But first, let’s take a look at the basics of risk and risk management before we can help you establish a flourishing business.
What is Risk and its Types?
Risk arises from actions and choices that can potentially have a negative effect or result in a loss for an organization. The effect can be tangible or intangible, and it is commonly associated with money or growth for organizations. The two main types of risks are systematic risk and unsystematic risk. Systematic risk is macro in nature, and it cannot be controlled by a single organization as it is affected by the overall market; unsystematic risk, however, can be controlled as it is specific to each organization. The types of systematic risk include:
This includes both internal and external risks related to a company’s operating performance, and they affect the profitability of an organization. The revenue of a business can be influenced by demand, prices, competition, government regulations, and the economic landscape, which is factored in business risk. Additionally, this risk also encompasses operating risk, which is dependent on the cost structure based on fixed and variable costs; the fluctuations in variable costs also affect the bottom line, which is why a business must manage it.
This is the uncertainty of net income and cash flows related to external financing that has a fixed cost. A company can finance its operations by incurring debt or through raising capital. Companies with a higher percentage of debt are considered leveraged, and they have to make monthly interest payments for a fixed period of time regardless of sales volume. Equity-backed companies don’t have a high percentage of financial leverage, making them an attractive and less risky option for investors. Companies have to manage their debt as a higher percentage can mean they are exposed to financial risk.
What is Risk Management?
Risk management is a process that allows individual risk events and overall risk to be understood and managed proactively. It is important to know risk cannot always be eliminated completely, but you can always minimize the impact. Risk management aims to focus on anticipating where your planning might fall short and put in place actions to reduce uncertainty to an acceptable level. Risk inherently is not bad for an organization as high rewards usually accompany it once you can manage it effectively, which can be done through a four-step process
- Identify the risk. It would be best if you allocated time at least every quarter to sit down with your team and use their knowledge and insights to assess the overall business situation so that you can see identify areas where potential risk exists
- Analyze the risk. Once you have an overview of possible risks your business can be exposed to, you need to evaluate the probability of those risks materializing and the resulting effect they would have on your business. After you have prioritized the options, you need to identify the best approaches for dealing with the risks
- Treat the risk. After you have a list of approaches, you need to treat the risks according to the priority level established by identifying which risk mitigating solutions you have to use to eliminate or minimize the risks
- Monitor and review. The risk management process is continuous in nature as you need to assess whether the risk has been eliminated and review your previous actions to determine if they have been effective
Why is Risk Management Important?
For most businesses, their success is related to their profitability, and any strategy that can improve profitability is essential for growth. By introducing risk management, an organization can save money and resources that would have been utilized for damage control if any risks became threats. A well-designed risk management plan could help set safeguards in place to avoid threats and minimize any blowback if they came to fruition.
The plan can help organizations understand and control risks which can provide them with a confidence boost and allows the leadership and management to focus primarily on business strategies and decision-making to facilitate further development and assist the company in achieving their goals. It also creates a secure workplace that protects all involved parties from potential harm, including employees and customers. Business interests are also protected from any events that can damage the company’s operations and reputation by ensuring the strategy is in line with legal and government regulations.
How Can You Effectively Manage Risk in Business?
Established organizations can greatly benefit from the four-step process, but if you are just starting out, you might not be experienced enough to identify potential risks. If you are new to running a business, you might not be aware of the risks involved in working in your chosen industry with a team of professionals. New entrepreneurs and fresh leaders tend to underestimate the risks involved when working with a team. In order to protect themselves from potential liability, they can use the services of experienced consultants who can provide standards of industry-leading practices in departments such as HR, safety, training, and auditing, so there are clear processes in place. The clarity offered with a risk-mitigating structure can help organizations avoid situations that can cost a lot of time and resources.
With the COVID 19 pandemic, organizations have been exposed to an alarming situation that requires risk mitigation through different fronts as employee health and safety is a primary concern to ensure they are healthy enough to perform their job. Managing risk in this situation requires a four-step assessment of the impact of COVID 19 on business functions and employee well-being so the organization can implement relevant safety policies introduced by HR backed by authorities such as the World Health Organization and other government regulations in place to protect citizens which in effect can offer employee protection and risk mitigation.