You can’t understate how important it is to understand risk in business, which is maybe why there are so many websites, articles and books dedicated to explaining why this is so. It’s important to understand what risk, in a business context, actually means.
To begin with, we must first understand how risk is defined.
Risk is a condition that emerges due to uncertainties. In the business world, uncertainties do occur and should be expected and that’s why it’s crucial for companies to better understand how to manage them in such a way that leads to beneficial future outcomes.
Investopedia defines business risk as:
- Any exposure a company or organization has to consider that may lower its profits or cause it to go bankrupt.
- The sources of business risk are varied but can range from changes in consumer taste and demand, the state of the overall economy, and government rules and regulations.
- While companies may not be able to completely avoid business risk, they can take steps to mitigate its impact, including the development of a strategic risk plan.
Some of these risks may have the potential to be very dangerous and may even bring the business to an end, while some could cause serious damage, which can be both costly and time consuming to “repair.” But if we’re aware of risks and can anticipate, and even prepare, for them, businesses stand a better chance of surviving, and possibly thriving, as a result.
Start with conducting risk identification
When you’re in business it’s important to first have something called risk awareness. Think of this as a kind of early warning system in anticipating losses, but also as a way to understand potential business opportunities. By implementing risk management, we are able to simultaneously build a culture of transparency and accountability.
If and when a risk becomes a reality, a well-prepared business should be able to minimize the impact on earnings, time-loss and productivity, and most importantly the negative impact on customers. For startups and established businesses, the ability to identify risks is a crucial part of strategic business planning.
Fortunately, there are several strategic ways to identify risks, which rely on comprehensively analyzing your company’s specific business activities. Most organizations face preventable, strategic and external threats that can be managed through a number of approaches, which either accept or transfer or reduce or eliminate the threats.
Here are my tips that business owners can follow on how to manage emerging risks when running a business.
Manage limitation strategies for high-risk customers
If you’re just getting started with your business, it’s crucial to first identify your customers. For example, if you have customers that are classified as “High-Risk” because of poor credit ratings, it would make sense to immediately implement a rule where those customers are required to pay ahead of time, thereby avoiding potential complications down the road. And to do this you really need Standard Operating Procedures (SOPs) in place to be able to identify poor credit risks in advance.
Create a risk management plan: prioritize potential risks and threats
Strategic prioritizing can be implemented first by calculating and classifying risks based on the scale of tolerance and/or impact. By creating these classifications through multiple ranges, business owners are then able to more easily identify the risks based on objective tolerance, which makes managing them easier because you’ve anticipated and made plans to deal with the risks accordingly.
You could use a variety of scales to do this. A “chance-based” scale for example, would mean having a scale ranging from ‘very likely to occur’ to ‘some chance of occurring’ to ‘a small chance of occurring’ to ‘very little chance of occurring.’
High risks should be given priority when it comes to planning, preventing or even mitigating their impact on your business but it’s also important to remember that some low-risk categories can also have serious negative financial implications, so they too, should be prioritized.
Transferring risks with suitable insurance
It’s always a good idea to first assess liabilities and legal regulations to determine the type of insurance your business will need. Nowadays, there are various types of insurance, and choosing the right one for your needs will allow you to transfer your risk to insurance companies for a relatively low cost, especially compared to the potential financial impact of a risk becoming a reality.
Implementing a quality and assurance scheme
Be sure to test your products and services in order to assure the highest quality. By testing and analyzing what you’re actually offering, you’ll have the opportunity to make necessary adjustments. I believe this is normal business practice, but you should also strongly consider taking this a step further to include evaluating your testing and analyzing methods. Remember, a good reputation is imperative if you want a sustainable business. Customer service is the key to your success!
Maintaining growth and sustainability
This includes everything to do with employee training. If you’re selling products and/ or services and you set lofty goals for employees, then there’s the potential for employees to be tempted to take unnecessary risks to meet those goals, which may very likely lead to a bad reputation for your company. Instead, train your employees to focus on quality, not quantity. By doing so, you will avoid the risk of declining sales due to high-pressure sales tactics that customers may not appreciate.
Innovation does, in fact, serve as a key to success, however don’t innovate too fast. Instead, consider “Calculated Innovation” so you’re able to better prepare and time your innovations. Consider your company’s readiness, as well as the market’s readiness. If your company is constantly relying on innovation for growth, a hiccup may be inevitable, since not all new products and services will be successful, whether internally or externally.
Setting up a risk management team
Setting up an internal risk management team is also something certain businesses would be wise to consider. By implementing internally, you have the chance to save capital as it eliminates outsourcing expenses if you hire an outside firm. But be warned; if you’re planning to do this internally, you’ll need someone within your team to have the necessary experience in this area as well as having strong leadership skills.
Otherwise, paying for an outside risk management team could be a worthwhile investment. They will be able to map out all the risks/ threats to your company based on your type of business and set up strategies for immediate implementation if any of those risks eventuate. This should lead to the prevention, or mitigation, of those risks/ threats.
What we can learn from this?
Risk management should be considered as a form of insurance in itself and is an imperative step for sustainable success. The tips I’ve outlined should get you started in shaping a risk management plan, but this is just the start. A deep dive into your business and industry will help your business to better design and form a risk management plan that could save the business you worked so hard to establish.
If you’d like to have more information regarding investing and investments, please feel free to reach me through ridwan@sevenstonesindonesia.com and I look forward to being your partner in growth.
