Risk Management Strategies for Your Business

A risk management plan is among the many important things that an entrepreneur needs to have as a way of securing the future of your business. It is about being ready or prepared for any unforeseen circumstances so that you can be able to get the ways out.

Having a risk management strategy provides one with an organized and a clear approach to identifying, assessing and managing any form of risk that may come your way. Any organization, be it small or large, can be in a position to develop their own risk management plans.

No one is ever ready for disaster, but with risk management plans in place, one will be sure of increased long term success in their businesses. The following can be leads on how to go about the whole planning issue:

Come up with a plan

All organizations have their own different needs that are categorized from the most important to the least important. This will help when it comes to planning on the varying types of risks that the organization considers may affect them.

Avoid the Risk

Sometimes, a risk will be so serious that you simply want to eliminate it, for example by avoiding the activity altogether, or using a completely different approach. If a particular type of trading is very risky, you may decide it’s not worth the potential reward, and abandon it.

The advantage of this strategy is that it’s the most effective way of dealing with a risk. By stopping the activity that’s causing the potential problems, you eliminate the chance of incurring losses. But the disadvantage is that you also lose out on any benefits too. Risky activities can be very profitable, or perhaps have other benefits for your company. So this strategy is best used as a last resort, when you’ve tried the other strategies and found that the risk level is still too high.

Reduce the Risk

If you don’t want to abandon the activity altogether, a common approach is to reduce the risk associated with it. Take steps to make the negative outcome less likely to occur, or to minimize its impact when it does occur.

This is probably the most common strategy, and is appropriate for a wide range of different risks. It lets you continue with the activity, but with measures in place to make it less dangerous. If done well, you have the best of both worlds. But the danger is that your controls are ineffective, and you end up still suffering the loss that you feared.

Transfer the Risk

We’re all familiar with the concept of insurance from our everyday lives, and the same applies in business. An insurance contract is basically a transfer of risk from one party to another, with a payment in return.

When you own a business, you have the option to transfer many of your risks to an insurance company as well. You can insure your properties and vehicles, and also take out various types of liability insurance to protect yourself from lawsuits

Accept the Risk

Risk management comes at a price. Avoiding a risk means constricting your company’s activities and missing out on potential benefits. Reducing a risk can involve costly new systems or cumbersome processes and controls. And transferring a risk also has a cost, for example an insurance premium.

So in the case of minor risks, it may be best simply to accept them. There’s no sense investing in a whole new suite of expensive software just to mitigate a risk that wouldn’t have had a very big impact anyway. For the risks that received a low score for impact and likelihood, look for a simple, low-cost solution, and if you can’t find one, it may be worth simply accepting the risk and continuing with business as usual.

The advantage of accepting a risk is pretty clear: there’s no cost, and it frees up resources to focus on more serious risks. The downside is also pretty clear: you have no controls in place. If the impact and likelihood are minor, that may be fine. But make sure you’ve assessed those things correctly, so that you don’t get a nasty surprise.

 Monitor

Putting measures in place isn’t enough; you also need to check whether they’re working, and monitor your business on a regular basis to identify and deal with new risks.

The starting point is the plan you’ve been putting together. You should now have a list of all the risks in your business, an assessment of their likelihood and impact, an evaluation of your current controls, and an action plan for dealing with them.

The danger with a document like this is that you spend lots of time preparing it initially, but then never go back and update it later. A good risk management plan must be a living document, constantly referred to and updated to reflect new situations, new risks, and the effectiveness of your actions.

There’s no hard and fast rule about how often to update your risk management plan. Large companies have whole departments dedicated to full-time risk management, whereas in a small company the resources you can devote to it will probably be more limited. The key is to make a commitment to update your plan regularly, whether that’s on a monthly basis, quarterly, or even annually.

One of the best approaches is to make small changes to individual items on an ongoing basis, as the changes occur, and then to carry out a more comprehensive review of the document on a less frequent, but still regular schedule. The comprehensive review would include going back to the steps we covered in the earlier parts of this series, brainstorming about all the risks your business is subject to, adding new items to the list, and ranking them by importance. Then do the same with your existing risks, noting any changes.

Article by Vera Shawiza.