Small business risk management strategy
No business life lesson can be complete without a discussion on risks and risk management. Risks are inherent in everything we do - from crossing the road to running a business. Business risk management is the key to ensure risks are identified and a plan-B thought of. Some risks we can control while others we cannot. The mere mention of business risk evokes different feelings depending on our disposition towards risk. Some of us are risk acceptors (the entrepreneurs and innovators) while others are risk averse while still others are risk neutral.
Before we even begin our discussion on a business risk management strategy, let’s be clear on what the term means. A number of people mistakenly associate risk with just bad things. “Oh! Let’s not invest there, it’s risky. We could lose our money.” Or “It’s too risky to take on this project.” But, risks can be good and bad. An effective business risk management strategy ensures you recognize the good and the bad.
How you perceive risk
Risk is the probability that “good” OR “bad” things may happen that will impact your objectives. Risk management is the process of identifying potential negative outcomes and managing them while realizing potential opportunities. In layman terms risk management is:
- Identifying and minimizing the events that can negatively impact your objectives
- Identifying and maximizing (if possible) the events that can positively impact your objectives
You may be the type of individual who loves to take on risky ventures. At the other end, you tend to avoid risk taking at all. (Hmm … an entrepreneur and not a risk taker? That looks like a mismatch!) Whichever category you belong to, always look at the cost-benefit of each risk and then decide. You can apply the same concepts of risk identification and risk management strategy for both your business and non-business risks. And in order to do that, you need to understand the drivers of risk.
The first step, of course, is to identify what kind of risks your business is exposed to. But where do you look for them? Both internal and external factors drive risk. You probably know some of them already.
- External drivers
- Strategic risks: Competition, Customer needs & demands, Industry changes
- Operational risks: Government regulations, Political environment, Culture, Vendors/suppliers, contracts
- Financial risks: Interest rates, Foreign exchange, Credit
- Hazard risks: Natural disasters
- Internal drivers
- Strategic risks: R&D, Intellectual capital
- Operational risks: HR, Systems & processes
- Financial risks: Cash flow, liquidity
- Hazard risk: Safety (Employee and Equipment), Security
The next step is to analyze and evaluate your risks.
Risk evaluation and analysis helps you determine the significance of each risk. It also enables you to decide whether to accept, mitigate or take action to prevent it. There are a number of tools you can employ to analyze risks:
- Market surveys
- R & D
- SWOT - Analysis of Strengths, Weakness, Opportunities, Threats
- PEST - Political, Economic, Social and Technology analysis
- Scenario Analysis
- Auditing and Inspection
- Industry benchmarking
- Business process analysis
- Risk map
Once the risks have been identified, I usually rank them based on their probability of occurrence and their impact. Check back with your business plan how the identified risks can impact your business. Use it to put in systems and controls in place to deal with the consequences of the identified risks - even the good ones.
Dealing with risk
Once you have identified, evaluated and analyzed your risks, it is time to deal with them. You can do one of gour things for each risk:
- Accept - There is nothing much you can do about certain risks. It is just beyond your control. Or the cost of eliminating a particular risk is too high. [Update: Sometimes the best option is to do nothing at all. For example, Dell did not consider all the factors when evaluating their risks. See this post "Dell Demands Takedown Of Our "22 Confessions Of A Former Dell Sales Manager". Had they thought through this, they would have let things be and not stirred up the storm.]
- Transfer - Insurance is one of the well known methods to transfer risk.
- Reduce - You may be able to introduce systems and processes to reduce certain risks. Th negative impact of the risk is reduced.
- Eliminate it - Ideal, isn’t it?
Risk management is a continuous process that required discipline and effort from all parties involved. You need to monitor risks that have a negative impact and ensure changes, if any, need to be made to your strategy. An effective risk management process can significantly improve the success of your business.
This article was included in the following Carnival/s Strategy categories.