Risk management refers to the process of of identifying, planning and implementing steps to protect your business from adverse consequences.
The goal of a risk management plan is to identify the common risks associated with your business and to be aware of the situations that cause them. A plan of action that can be monitored and evaluated regularly for its effectiveness, would then be implemented to minimize these risks.
So the first step is to identify the risks related to your business. Every business is subject to two forms of risk, internal risks and external risks. It is often possible to control the many of the internal risks but by and large, the external ones are out of your control.
Internal Risks
Internal risks can be seen as potential weakness within a business and refer to areas such as employees, equipment and finances. For a business owner employee illness, theft and fraud pose an ongoing threat.
Equipment break down and malfunction can mean normal operations are disrupted, resulting in a potential loss of income. Computing systems are constantly exposed to many security and data loss issues.
As far as finances are concerned, one of the main risk is from cash flow. Maintaining healthy cash-flow is crucial for all businesses, so anything that disrupts this can be considered an internal risk. Other internal risk can come from injuries or damages caused by your business which result in litigation and fines.
External Risks
External risk are the threats to a business that can come from the economy, government policies, and the market in which it operates. The state of the economy has an impact on how well your business does, when economic conditions are unfavourable this can have an adverse effect on performance.
The implementation of new government policies also posses potential risk in that the policies may be negative for your business sector going forward. Other potential external risks can come from your competition, and any structural or demographic changes that may take place in your chosen market niche.
Putting Together A Plan
Once the risks have been identified, and ranked based on their level of importance, next comes the step of putting together a comprehensive plan to help manage these risks.
One of the key risk management tools available to all businesses is insurance. It is a good idea for businesses to have a portfolio of insurance policies that are aimed at reducing some of the potential risks identified. These policies can vary from public, product and employer liability to professional indemnity, property insurance and income protection.
Financial Risk Management
For financial risk management there are a few simple strategies that can be used, such as monitoring the movement of cash in and out of the business with bookkeeping software and conducting cash flow forecasts on a regular basis. This will allow small businesses to identify any fluctuations in cash flows and anticipate in advance periods when it might be negative.
Technology
For reducing technology related risks, there should be a reliable data backup and recovery system in place as well as a comprehensive cyber security strategy to protect against any online threats.
Designated Risk Manager
It is important for small businesses to have a designated person who is responsible for dealing with risk management, and they should be given the necessary training and tools to handle this task effectively. They should routinely monitor which strategies are working and which ones aren’t, so as to make sure resources and time aren’t being wasted.
In summary, running a business involves a variety of risks that can’t always be avoided. Having a proper risk management system in place does not guarantee coverage from all risks. However it can help minimise and eliminate many of them, making your business safer and more resilient.
