“Without risk there is no reward.”
In business, the importance of risk is often touted by people who have achieved success because of their hard work and willingness to take chances. Not all risk is good, however. Often risk taking is the result of either being ignorant of or willfully ignoring potential threats. That inaction can ruin a business. Risk identification and risk management are key elements of helping a company succeed long term, financially and otherwise. If you are concerned about your company’s overall health and reputation, you must manage its risks.
What Is Risk Management?
A basic definition of risk management is predicting and evaluating potential risks paired with identifying effective ways to avoid or minimize their impact. Making well informed, careful, and conscious decisions is always valuable, but especially so when you are taking on risk deliberately to grow your company.
Risk management does take considerable time and effort. Too often this is considered a less valuable use of time and company resources but avoiding problems can actually save both in the long run.
For example, in our last blog we discussed cyber-attacks. People often don’t consider the toll that a cyber-attack can have on their business, not just in monetary terms, but how it will impact customer relations and their reputation as a company. Technology is complex, difficult to understand, and constantly changing. Because of this, this risk is often shrugged off as either not likely to happen or inevitable. A passive response to this type of risk is a big gamble, and it can lead to disastrous results. With more care and strategy, this risk can be avoided, and procedures put into place to stop or mitigate any attack that might occur, saving the company from harm.
Different Types of Risks
Not all risks are external. Internal risks, or weaknesses, can also sink a business if they are not addressed. This would include employee problems, internal politics, safety issues within your physical building or plant, or technology. If there is an issue within your company that can or will impact its success, it’s a weakness. You are taking a risk not addressing it.
External risks, or threats, would include the economy, political decisions that affect your company, or natural disasters like hurricanes. Companies have less direct control over these types of threats, but they should still brainstorm and take measures to mitigate whatever effect they could have on their ability to continue operating. A cyber-attack from a malicious hacker is an external risk. Choosing to ignore weaknesses in your network security is an internal risk.
Identifying Risk within Your Company
The first step in implementing risk management is to identify areas of risk within your company. This should be a group effort and should involve anyone in the company who has knowledge about key elements of its operation. This would include both company leadership, operations management, your workforce, as well as outside experts.
Consider any risk that could slow or halt your company’s profitability. It will take some time to identify them, and this process should be repeated periodically because risks are not set in stone. They change over time and are not always predictable. In December 2019, almost no one would have predicted a worldwide pandemic and lockdown measures as external threats, but every company now should consider how they would handle a forced shutdown caused either by government measures or labor or supply shortages.
Once you have identified your risks, you should rank them according to the impact they could have on your business operations, continuity, or future growth. Unless your company is running like a top and flush with cash, it’s not likely you will be able to eliminate any and all risks that your business faces. You will need to prioritize them so that you can deal with the biggest ones (or the ones easiest to fix) first. From there, it’s a matter of identifying the problem and then finding a solution. This sounds simple. In some cases it might be as easy as finding the right expert and paying them to eliminate the risk, as in the above cyber security example. Other risks, especially those involving leadership or transitions, can be far more complicated.
Finally, risk management involves planning a response to a projected problem or implementing preventative measures to eliminate a future problem. Some risks cannot be prevented. To use the lockdown example, if your company is located in an area where your government officials have decided lockdowns are an appropriate response to pandemic conditions, you will have to brainstorm ways to prevent this from negatively impacting your business. Many companies relocated their headquarters in 2020-2021 as a response to this risk. Others decided to pursue e-commerce or develop alternate streams of income as a way of surviving lockdowns. Relocation is a preventative measure. Investing in e-commerce during a lockdown is a mitigation response. Depending on your company’s location, industry, workforce, and financial health, your response will differ.
Why is risk management vital to a business? Ultimately, the goal of any company is to survive and thrive under any financial or economic circumstances. Implementing a risk management strategy will help strengthen your business by eliminating potential weaknesses ahead of time. A stronger business is a more stable and profitable one. If you would like help identifying the risks your business faces and developing a risk management plan, please call us at Prometis Partners. We are here to help your business become stronger.