There is no business that is risk-free, and these risks tend to impact your business negatively. However, you can overcome these risks by employing proactive and reactive risk management strategies. You’ll need a solid plan to mitigate the risks you face.
The plan should include:
1. Identify the risks
The first step to overcoming any challenge or threat you face is by identifying it. How do you identify the risks? The easiest method is by consulting the people who understand the organization. You can use workshops or brainstorming to identify risks that could possibly affect the organization. The next method involves a more detailed analysis of all aspects of the organization and its operations. This method seeks to identify the hidden risks or points of failure that you could have missed during the intuitive stage.
2. Estimate risk
Once you’ve identified the risks, the next step is to estimate the likelihood of the risks affecting your organization and the possible impact. Calculate the cost to rectify the risk if it affects your company. Identify the areas that will be affected by the risk and its likely impact on your business. In case of a hazard, identify who will be harmed, the cost to prevent it versus the cost to recover.
If you’re faced with several risks, you can estimate the probability of each risk and the impact. Identify which risk is likely to occur first, and which one will have the most significant impact.
3. Risk control
You’ve identified the risks, and you know the impact, the next step is risk control. Here is how you do it:
a. Accept the risk
You’ve acknowledged that there is a threat headed for your business, and you’ve accepted the risk. This strategy typically works for minute risks that will have zero to minimal impact on your business. These are risks that are easier to deal with once they arise, or it will take too many resources to try and prevent them. Thus, companies opt to deal with impact instead of committing resources too early.
b. Risk avoidance
If you’ve identified a risk that will have a significant impact on your business, you might want to avoid it. For example, you can decide to invest in a foreign country where there is a risk of political instability. Every time a country is politically unstable, it becomes harder to do business, and there is a risk of sanctions from major economies. All these issues will affect your investment negatively. Instead of facing these risks, you can invest in a country with better returns and a stable political environment.
c. Risk reduction
This involves trying to make the impact of the risk smaller. For example, if your company is at risk of incurring losses due to theft, you can install security systems. This will help reduce the impact of the theft, and in some cases, it will prevent the risk.
This would also apply during disasters when companies expect huge losses. The companies would implement strategies to reduce the risk of damage and loss. They would also have a recovery plan to help restore their operations to full capacity.
d. Risk transfer
This involves shifting the risk to another party, such as an insurer. For example, in the risk of theft, you can outsource security services, which will transfer the risk to the company providing the security services—the same way you insure your car when you buy it. In case of an accident, the insurer assumes the responsibility for restitution.
e. Exploit the risk
Not all risks have a negative impact, and sometimes the negative impact is minute compared to the potential gain. The idea when dealing with risk is that you protect what you’ve got before trying to get more. For example, technology is a risk for any organization. AI and mechanization are making certain jobs irrelevant. Companies might see this as a risk, but it’s a positive risk that could help improve their production rate while reducing costs.
You could also experience a positive risk in marketing by underestimating the demand for a service or product. This means that you produce less than the demand or your facilities can’t handle the multitude of people seeking the service. In such scenarios, you can adjust your production rate, or services to accommodate the growing demand.
4. Risk budgeting
Whichever risk strategy you choose to pursue, you’ll need funds and other resources to ensure it’s effective. Also, it’s impossible to plan for every single risk that could affect your business. However, it’s easier to recover when you set aside funds for such incidents. This ensures that your company is able to recover even in worst-case scenarios. You can also purchase business insurance coverage, which helps alleviate the risk by transferring it to the insurer.
Conclusion
You can never be too cautious, so keep assessing your company, the business environment, and any other areas that could potentially prove risky.