All business faces risks that could present threats to their success. That’s why minimizing risk should be a central part of any business’ strategic management. Risk management helps you to identify and address the risks facing your business and in doing so increase the likelihood of successfully achieving your businesses objectives.
Risk is defined as the probability of an event and its consequences. Risk management is the practice of using processes, methods and tools for managing these risks.
Risk management focuses on identifying what could go wrong, evaluating which risks should be dealt with and implementing strategies to deal with those risks. Businesses that have identified the risks will be better prepared and have a more cost-effective way of dealing with them.
Risk management becomes even more important if your business decides to try something new, for example, launching a new product or entering into a new market. Competitors following you into these markets, or breakthroughs in technology which make your product redundant, are two risks you may want to consider in cases such as these.
There are many different types of risk that your company may face, however, the main categories of risk to consider are:
- Strategic, like a competitor coming on to the market
- Compliance, for example the introduction of new health and safety legislation
- Financial, for example non-payment by a customer or increased interest charges on a business loan
- Operational, for example the breakdown or theft of key equipment
These categories are not rigid and some parts of your business may fall into more than one category. The risks attached to data protection, for example, could be considered when reviewing your operations or your business’ compliance.
Strategic and compliance risks
Strategic risks are those risks associated with operating in a particular industry and may result from a merger or acquisition, industry changes or research and development.
Compliance risks are those associated with the need to comply with laws and regulations. They also apply to the need to act in a manner which investors and customers expect, for example, by ensuring proper corporate governance.
You may need to consider whether employment or health and safety legislation could add to your overheads or force changes in your established ways of working.
You may also want to consider legislative risks to your business. You should ask yourself whether the products or services you offer could be made less marketable by legislation or taxation – as has happened with tobacco and asbestos products. For example, concerns about the increase in obesity may prompt tougher food labelling regulations, which may push up costs or reduce the appeal of certain types of food.
Financial and operational risks
Financial risks are associated with the financial structure of your business, the transactions your business makes and the financial systems you already have in place.
Identifying financial risk involves examining your daily financial operations, especially your cash flow. If your business is too dependent on a single customer and they are unable to pay you, this could have serious implications for your business’ viability.
Additionally, rate changes will affect your debt repayments and the competitiveness of your goods and services compared with those produced abroad.
Operational risks are associated with your business’ operational and administrative procedures and may include recruitment, supply chain, IT systems, board compositions, regulations and accounting controls.
In these instance, you should examine these operations, and in turn, prioritize the risks and make provisions for such a risk happening. For example, if you are heavily reliant on one supplier for a key component you should consider what could happen if that supplier went out of business and source other suppliers to help you minimize the risk.
IT risk and data protection are increasingly important to business. If a breach occurs, you incur the theft of valuable data and even money from your bank account which at best would be embarrassing and at worst could put you out of business. A secure IT system employing encryption will safeguard commercial and customer information.
How to evaluate risks
Risk evaluation allows you to determine the significance of risks to the business and decide to accept the specific risk or take action to prevent or minimize it.
To evaluate risks, it may be worthwhile to rank these risks once you have identified them.
This can be done by considering the consequence and probability of each risk. Many businesses find that assessing consequence and probability as high, medium or low is adequate for their needs.
These can then be compared to your business plan – to determine which risks may affect your objectives – and evaluated in the light of legal requirements, costs and investor concerns.
Choose the right insurance to protect against losses
Insurance will not reduce your business’ risks but you can use it as a financial tool to protect against losses associated with some risks. This means that in the event of a loss you will have some financial compensation. This can be crucial for your business’ survival in the event of, say, a fire which destroys a factory.
Insurance companies increasingly want evidence that risk is being managed. Before they will provide coverage, they want evidence of the effective operation of processes in place to minimize the likelihood of a claim.
Need advice? Contact Roper Insurance today at 303-721-1145.