Understanding Risks- a Guide for Small Businesses
How can small business owners is finding the proper balance between peace of mind and profitability?
Risk is an inherent part of being in business. It can be managed and its adverse outcomes can be mitigated. However, the greatest challenge for small business owners is finding the proper balance between peace of mind and profitability. Trying to completely eliminate risk from your business is unrealistic and can be prohibitively expensive or cause you to institute policies that may be so risk-averse that your business never grows.
When many business owners think about “risk management”, it’s usually limited to purchasing standard insurance protection without much consideration for other ways to protect the business. However, it’s important to study the nature of your business and from there, plan to mitigate the risks that could affect your business.
The most common business risk categories are:
• Strategic –decisions concerning your business’ objectives
• Compliance –the need to comply with laws, regulations, standards and codes of practice
• Financial –financial transactions, systems, and structure of your business
• operational –your operational and administrative procedures
• Environmental –external events that the business has little control over such as unfavourable weather or economic conditions
• Reputational –the character or goodwill of the business.
Others include health and safety, project, equipment, security, technology, stakeholder management and service delivery.
Let’s get started with a simple, easy to follow the plan for managing and mitigating business risks at your company.
Risk Assessment Strategy for Small Businesses
Your risk management plan should detail strategies for dealing with risks specific to your business. It is important to allocate time and resources to preparing your plan to reduce the likelihood of an incident affecting your business.
You can develop a risk management plan by following these steps:
Identify the risk
Undertake a review of your business to identify potential risks. Some useful techniques for identifying risks are:
• Evaluate each function in your business and identify anything that could have a negative impact on your business.
• Review your records such as safety incidents or complaints to identify previous issues.
• Consider any external risks that could impact on your business.
Brainstorm with your staff and ask yourself ‘what if’:
• you lost power?
• your premises were damaged or not accessible?
• your suppliers went out of business?
• there was a natural disaster in your area?
• one of your key staff members resigned or was injured at work?
• your computer system was hacked?
• your business documents were destroyed?
Assess the risk
You can assess each identified risk by establishing the likelihood (frequency) of it occurring and the consequence (impact) if it occurs.
TIP: You can calculate your risk level with this formula: Level of risk = likelihood x consequence
To determine the likelihood and consequence of each risk, it is useful to identify how each risk is currently controlled. Controls may include:
• engineering controls
• administrative controls
• personal protective equipment.
A risk analysis matrix can also assist you to determine the level of risk.
Manage the risk
Managing risks involves developing cost-effective options to deal with them including:
• Avoid the risk - change your business process, equipment, or material to achieve a similar outcome but with less risk.
• Reduce the risk - if a risk can’t be avoided, reduce its likelihood and consequence. This could include staff training, documenting procedures, and policies, complying with legislation, maintaining equipment, practising emergency procedures, keeping records safely secured and contingency planning.
• Transfer the risk - transfer some or all of the risk to another party through contracting, insurance, partnerships or joint ventures.
• Accept the risk – this may be your only option.
Monitor and review
You should regularly monitor and review your risk management plan and ensure the control measures and insurance cover is adequate. Set up a meeting to discuss your risk management plan with your insurer to check your coverage.
This review meeting should include the owners, department heads and (if warranted) a risk management consultant. Many times insurance companies – with an eye on reducing payouts on claims – provide hands-on advice on mitigating new risks as they come along.
During the update period, it would be a good time to reach out to them as well. Having a good grasp of risk management for your business will also be important if you plan to raise capital from investors. It is essential for getting them comfortable with the investment opportunity.
Reckless leaders take reckless risks; prudent leaders take calculated risks. Risk management is the “calculator.”
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