The impact of risk management on small business performance is vital, especially given the volatile economy.
According to the NAIC, small businesses generate nearly two-thirds of new jobs in America, similar to most comparable economies.
So, these businesses must thrive under various conditions, from large swings in the stock market to sudden changes in government policies.
This article will explore some of the critical elements of risk management and how they impact small business performance.
What is Risk Management?
Business Risk management is a method of risk identification, risk assessment, risk monitoring, and controlling and mitigating business risk.
Through risk assessment and a risk management plan, you can determine what steps will be taken to control and mitigate risk before it impacts the business without waiting until after the fact to respond. This contrasts with litigation or defence activities, which tend only to act as post-factum solutions for protecting one business and are based on past actions. They are not predictive events perceived through analysis and planning.
Standard tools exist for risk assessment. These tools are essential to reference when looking at the success of small businesses in general. With their slim margins, many companies do not have ample resources to invest in new systems that determine how best they can manage risk. This means that if these risks go unchecked long enough, they impact firm performance.
Suppose you think of a risk management program as a business’s planning department. In that case, it will provide ongoing analysis and assessment of how best to prepare for the events that may threaten business continuity, mainly regarding financial stability. The term can be used broadly at different levels, from business operation strategies to specific functions such as performance, production, finance, and accounting.
Risk Management and Business Performance
Risk is considered an “invisible hand” that shapes the course of a whole business.
If all things are equal, operational risk in one business has consequences for another. Usually, positive or negative results, depending on how the risk culture, risk appetite and risk factors interact, e.g., does information sharing reduce or increase a potential risk? The ultimate likelihood and impact rely heavily on human judgement with little input from formal management procedures.
An organisation must be prepared for any outcome; prevention is better than after the fact.
Some attempts to manage risk in earlier times included, for example, assigning employees with protective colouration or some sign of their professional status, such as engineers wearing red shirts and repairers carrying toolboxes identified with the business name. Although effective, it has been better known that these measures were insufficient to ensure safety if no formal leadership occurred. This can only be achieved by motivating each employee actively toward “self-policing” safety.
Risk Management Process
The key to a risk management process is establishing a clear and complete plan that defines how risks will be managed wherever they appear.
One of its primary activities is allocating resources, controls, and policies. Identifying elements, defining action plans, and assigning responsibility have improved some businesses’ preparation.
To avoid affecting performance negatively or developing insecurity among stakeholders, making them subject to individualised risk assessments may be necessary. This has been widely proven as one of the main factors in improving organisational risk and enabling stakeholder awareness about risk threats and opportunities.
Another element within this process is considering employees. Some workers are more prone to accidents than others because they have restricted access to information, materials, and tools. So, it is recommended that risk assessments focused on this aspect be prioritised.
Risks can also be classified according to different significance levels, depending on their source, which is determined by risk assessment. If a risk exists, it can be managed only after being assessed.
Risks are considered as ready to take action and respond to different threat mechanisms when the two following questions are answered:
- What is the level of awareness about the likelihood and impact (positive or negative) resulting from the risk
- How does this constant state of risk presence or absence affect the business’s risks?
Directors must know that a company may not achieve its key business objectives without a robust risk assessment, analysis, and execution plan program.
Final Thoughts
Suppose you think of a risk management program as a business’s planning department. In that case, it will provide ongoing analysis and assessment of how best to prepare for the events that may threaten business continuity, mainly regarding financial stability. The term can be used broadly at different levels, from business operation strategies to specific functions such as performance, production, finance, and accounting.
As the economy keeps being volatile, small businesses need to consider the impact of risk management on performance.
Understanding how risk management can help control and mitigate potential setbacks and opportunities, they can continue growing and expanding the business.
Risk management is an essential part of any business. By learning about risk management, you can ensure your small business is prepared.
Do you have any questions about risk management that you would like answered in a blog post? Contact us, and we would be more than happy to oblige!
