Small business risk management strategy
Read the Guide to developing a 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.
Risk drivers
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 Analysis
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
- Brainstorming
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
Small business risk management strategy
8 different ways to diversify and manage risk, which discusses alternative strategies for intentionally varying the types of investments in your portfolio. From Atlantic Canada’s Small Business Blog comes Small business risk management strategy, providing a helpful guide to identifying and analyzing risks in the small business context. Investing: At Trader’s Narrative, a useful fuide to investor networking sites is on offer. At Finance Is Personal,
I think the risk analysis tools you mentioned are great for small businesses and larger ones alike. Great advice and help here, I’d like to know more about which risk analysis tools you use most.
It depends. Risks can be at a macro level and at a micro level. For example, if I am managing a project, I would tend to look at risks that impact the project - people related, finance related and other resources related.
If I am developing a strategy document, then I would focus on SWOT, PEST and Risk maps.
I try to refrain from one solution for all assignments. Each business and situation is unique and I identify risks around those uniqueness.
i want research notes about entrepreneurship and small business
Can you please be more specific David?
hi,
i am undertaking a research project on risk management strategies used by microfinance institutions and am lacking literature on the same. can u please help me.
I would suggest identifying some microfinance institutions and talking to them directly. Microfinance institutions work differently depending on their sources of funding. In Canada most of the microfinance lending institutions are the likes of WED, ACOA, REA while in the US there are a lot of private institutions too. The best bet would be to talk to a sample of these companies.
Hi, i am doing a project on business risk identification and mitigation, can you assist me with anything on the subject?
Sure. What help do you need?
Read and digest for the assignment
send me pls 4 more information
What more information do you need Adebiyi
Business Risk management is an important function of a company’s strategic management, and it is surprising how many companies fail to realize the need for Risk Management or its significance. It allows businesses to understand the consequences of their decisions on the existence and profitability of the company but also in terms of threats to all aspects of their business. Every business decision has some element of risk, and management helps to understand, identify and manage the potential impact of an event on the business.
Good point Alex. What you say implies that the management should have a strategy in place before risks to the strategy can be assessed.
Great post! Keep it up.
This is really helpful. Setting goals is something which I often struggle with, as I tend to make them either unachievable or I don’t make any at all. It’s easy to think about what you want to achieve, but unless you write it down and make some solid goals with time periods, it is unlikely that they will ever be achieved. Thanks a lot.
Good point for small business on the risk management. Although I don’t fully agree with it but it is quite informative. Pl do keep posting new blogs like this.
Thank you,
Lisa Campbell
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