Risks are normal in any business. Even the most successful businesses today had to deal with certain threats in the past that almost laid their success on the line. Sometimes, it is tempting to wish that your business no longer has to take any calculated risk and be as smooth sailing as possible, but that just cannot be.
In the real world, business is tantamount to risk-taking and you can’t just wish to keep risks at bay. Why? Because business does not work that way. Taking risks is necessary for any business for without it, growth is never possible. Remember, it is through risks that you get to meet new clients, discover new sectors and learn new things. Without risks, a business loses its essence.
People in the business sector are pretty familiar with the term risk management. By definition, risk refers to the probability of an event and its consequences. When you manage risks, you use certain methods, processes, and tools to deal with these risks.
Running a business involves different types of risk, and while some risks can go only as far as causing serious but manageable damage to your business, there are risks that are beyond repair and have the potential to destroy your business. That is why businesses, no matter how big or small, need to be equipped with the right methods and tools to prepare for these risks before they strike. While preparing for risks does not guarantee 100% that your business will be free from risks, such preparations can moderate their impacts on your business.
Risk management involves determining what could go wrong with your business and evaluating which of the possible risks you should deal with. After doing so, you implement strategies that will help you manage those risks. Managing risks before they strike is the most cost-effective way of dealing with them.
Potential Business Risks
Before you try to understand Risk Management as a process, it is important that you familiarize yourself with the different types of risk that businesses usually face.
Now that you know that this potential acquisition activity can pose a risk to your business, you have to prepare how you will respond once the risk is already at hand. As you do this, you may consider researching if there is any U.S. company that is big enough to do the acquisition and which among your Canadian competitors might be a target of this U.S. company.
When it comes to legislative risks, you may want to ask yourself if certain legislation, particularly tax laws, can make your products and services less marketable. For instance, some tobacco businesses were threatened when legislations pushing up the costs of tobacco products were passed. The significant increase in the cost of their products reduced their appeal and made it difficult for tobacco business owners to promote and sell their products.
The first and most important thing you should do to prepare your business for financial risks is by regularly examining your financial operations, most especially your cash flow. Being too dependent on one customer is not good for your business, because if that customer fails to pay you, that could have some serious implications when it comes to the viability of your business. Aside from cash flow, some of the other things you should examine are the ones who owe you money, the way you extend credit to your customers, and the things you should do to recover your owed money.
As you run your business, it is necessary for you to examine each aspect of your operations and make provisions for every possible risk that may turn up. For instance, being too reliant on just one supplier may pose operational risks for your business. Imagine if your sole supplier goes out of business. Where does that leave you? You can minimize this risk by looking for some other suppliers that you can do business with and not depending too much on the one that you currently have.
One of the most common operational risks today has to do with information security. As a business, you keep track of the necessary information. That is why part of your responsibilities as a business owner is ensuring that every bit of information is protected from hackers who may break into your IT system and steal valuable data from you. Many business owners have experienced losing large sums of money from their accounts to hackers due to poorly secured IT systems.
Aspects of the Risk Management Process
The process of managing risks is one of the most crucial parts of any business. It is often considered an indispensable part of strategic management because it helps you identify the risks confronting your business and address them. By doing so, you are able to increase the likelihood of your business’ success.
The risk management process basically involves micro-processes, such as systematically identifying the risks facing your business, evaluating the possibility of the occurrence of an event, understanding how you should respond to these events, setting up systems to tackle the consequences of these events, and monitoring how effective or ineffective your risk management processes are.
How Risk Management Benefits Your Business
While risk management does not totally guarantee the success of your business, it makes the risks manageable enough. Among the common results of the risk management process are the following:
If you are the type of business owner who always loves to try something new, knowing how to manage risks efficiently can benefit your business a lot. For instance, you plan on launching a new product. Two of the risks that you should consider in this case are the competitors that follow you in the market and the existing technologies that can possibly make your new product redundant.
Part of the risk management process is risk evaluation. This technique particularly lets you identify the signs of potential risks to your business and decide whether you are going to accept these risks or prevent them. But how do you evaluate these risks?
Evaluating risks basically involves identifying them and ranking them afterward. You can do this by determining the consequence and probability of each risk, such as asking yourself if their consequences and probabilities are low, medium or high. Businesses that efficiently assess their risks can attest to the advantages of this practice.
It helps to include a risk evaluation in your business plan, in which you determine the risks that can impact your objectives and assess them in the light of costs, concerns of investors and even legal requirements. In cases when the cost of preventing a potential risk is too high, not preventing the risk at all makes more sense. So, it is important that you assess these risks and weigh which will cost you more—preventing them or mitigating them once they’re already at hand?
In evaluating potential risks and assessing them based on cost, concerns, and legal requirements, it is best to plot a risk map and include there the likelihood of the risk’s occurrence. In this risk map, you rate each risk on a scale of 1 to 10, with 10 meaning that the risk is of major concern to your business. You can also include in the risk map the probability scale of each risk, which you do by assessing if the risk:
By plotting this map, you are easily able to visualize all the possible risks in relation to each other and see the extent of damage they can do to your business.
Four Ways to Deal with Risks
Since risks are normal in every business, they are not supposed to make you nervous. As a business owner, you have all the freedom to plan around these risks, limit their impacts and prevent the worst from happening. You only have four options when dealing with risks—mitigate it, avoid it, transfer it, or accept it.
When you manage potential risks to your business, you can take advantage of any of these four strategies independently or in combination. Just like in any endeavor, business requires careful planning. Even if you think that risk is not likely to happen, it is still best to prepare yourself for it.