Risk management refers to identifying, evaluating, and responding to business risks. The risks can be threats or opportunities caused by external or internal factors.
Small business owners should understand that they can be met with risks regardless of their business nature and size. Moreover, the risks they face can have a varying impact on their business operations. This could challenge their business’ long-term viability.
What is risk management?
A risk management plan prepares businesses for threats and opportunities, from internal and external risks, and manages any potential risk event that could impact (negatively or positively) the company.
The International Organisation for Standardisation under ISO 31000:2018 lists guidelines for risk management. Every business should try to work in line to make sure their business is risk ready.
What are the significant risks faced by businesses?
Small business owners must have a risk management strategy that helps identify the risk threats and opportunities. They should also follow a step-by-step approach that allows them to define the business risks they might encounter in the future.
Defining Business Risk
Small business owners must be aware of the different risk areas. We have defined six significant risk areas that business owners may encounter, preventing them from achieving their goals.
Health, Safety and Environmental Risk
Many health, safety, and environmental impact risks exist in workplaces today. Still, suppose you know how to identify these risks and avoid them. In that case, you can protect your employees and the public from these issues and protect the environment.
Financial Risk
Financial risk refers to the potential for a financial loss. This could be cash flowing in and out of your business, a project’s overrun, or a client’s loss. The impact of this happening can be very high in certain situations. For example, if a company depends on a single client for a large proportion of its revenue.
Operational Risk
Sometimes, small businesses are so worried about external issues that they cannot develop a risk management strategy to manage potential in-house problems. These operational risks include failures of your day-to-day operations, technical failures, missed schedules, poor performance, or resource issues. Operational risks might seem minimal in comparison to some external threats. However, the operations of a business are crucial to its success.
Reputational Risk
No matter the size of a business, the business’s reputation is vital to business success. A poor reputation can lead to loss of revenue, loss of customers, and staffing issues. It is essential to have an effective business reputation strategy to guard against this risk. Hiring the right third parties, employees, and directors will help minimise this risk.
Strategic Risk
These are directly aligned with the company’s strategy and may prevent a business from achieving its strategic goals. They may be caused, for example, by poor planning, operation or execution.
Compliance Risk
If your business does not comply with all the necessary laws and regulations, your business may face a compliance risk. It can even occur if your company has been expanding and you have stopped keeping track of the compliance measures.
What is a risk management process, and why do you need it?
How to create an effective risk management process
A risk management process requires one to follow a methodological four-step approach as explained below:
Identify
The most crucial and first step of creating a risk management process is identifying potential risks related to the business. You can start with a brainstorming session with your team members and define categories for the risks relevant to your business. Once you have identified all the risks, they should be placed in a Risk Register.
Assess
The next step is to analyse and assess the risks categorised in the first step. Risks are usually evaluated based on the product of two factors. These are:
- Likelihood of occurrence
- Impact on the business
The risk assessment results are stored in a risk register and visually provided on a risk matrix. A risk matrix gives all stakeholders an idea about the risks and how they may impact the business.
Manage
Next is managing risk by defining a relevant response for each. The risk response strategies for risk control and risk mitigation are listed below.
Risk response strategies
Monitor and review
This final part of the process comes in when risks have been identified and analysed and a risk management strategy developed and executed. A business should now allow the stakeholders to regularly monitor the risks and ensure they are controlled and mitigated until closed. Subsequently, an effective monitoring and review mechanism also needs to be defined.
