Risk is a natural part of business, but there are strategies you can put in place to mitigate any adverse effects. We’ll discuss the various types of risk below, both internal and external, as well as answer the question of ‘what is risk management’. Keep reading to pick a few tips for creating your own risk management plan.
What is risk management?
From fires and floods to legal action, there are many events that could have a negative impact on your business. Risk management offers a way for companies to prepare for these worst-case scenarios, putting plans in place to mitigate damages.
A good risk management plan should identify potential risks before listing the detailed plans for dealing with each issue. It looks at levels of risk, their impacts on your business, and the resources needed to mitigate each risk factor.
What are some types of business risk?
To get started, it’s helpful to understand the various categories of risk that businesses face today. Identifying risk is the first step towards working out risk management strategies. With that in mind, here are the primary categories of risk.
Physical risk: This includes dangers to your physical assets, including personnel, equipment, and property. Examples include natural disasters, flooding, and crime. Physical risk leads to a loss of property, time, and money without any safeguard in place.
Strategic risk: The second type of risk involves your company’s strategy. For example, if you’ve made poor strategic decisions you might suffer from low sales figures, reductions in profits, or damage to your reputation.
Financial risk: This relates more to your business’s cash flow as well as unforeseen changes to the economy overall. Financial risks can occur if you take on too much debt, have clients that don’t pay their bills, or the market takes a dive and your investments lose value. Financial risk management can prevent negative cash flow and bankruptcy.
Compliance risk: Is your business complying with all government laws and regulations? A lack of compliance can do major damage so you should have a risk management plan put in place. This ensures you’re complying with the latest health and safety, data protection, and environmental regulations.
Operational risk: While it’s easy to identify external risks like theft, there are also internal issues to be aware of. Operational risk management strategies relate to putting systems in place that prevent things like human error, systems failure, and embezzlement.
Reputational risk: Your brand’s reputation is key to its success. Poor reviews or going viral for all the wrong reasons can lead to a serious hit to its reputation, so be sure to think about this type of risk. Without risk management strategies, you could lose your business partners, clients, and revenue.
Security risk: Technology is another key factor to consider when assessing risk. Cybersecurity should be built into any risk management process as a result. Plan for data breaches, hacker attacks, and power loss.
How to create a risk management plan
Here are the steps you should follow to create effective risk management strategies within your own business.
Step 1: Identify the risk.
We’ve touched on all of the different types of risks above, so that you can pick and choose which best apply to your business. Sit down with all stakeholders to discuss the categories of risk you must focus on.
Step 2: Assess the risk.
The next step to the risk management process is to create an assessment matrix clearly laying out each type of risk, its likelihood of occurring, and the level of impact it would have. This helps you create a strategy that prioritises the most likely and damaging risks. Once you’ve ranked your risks in order of priority, identify key risk indicators and warning signs that each is about to happen. These will serve as a trigger for damage control procedures.
Step 3: Develop a response.
When key risk indicators are triggered, what will your company do? The third portion of any risk management plan is to develop your response. Think about preventive measures you can take as well as actions for mitigation, all based on your business’s risk tolerance and greater objectives.
Step 4: Review your response.
Risk management strategies must be reviewed regularly to ensure they’re still relevant. Monitor existing risks and schedule brainstorming sessions to identify new ones.
With consistent, methodical identification of risks, you can protect your company from damages. In addition to consulting with internal and external stakeholders, it’s also helpful to discuss your risk management plan with accountants, legal advisors, and your insurance providers. This will give you a well-rounded view of likely risks and their outcomes.
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