Turning an idea into a profitable venture is an underrated task. This explains why entrepreneurs are filled with joy once their businesses start breaking even. Sadly, 50% of small businesses will fail within five years, and the problem often lies in how businesses approach risk management.
Often, business leaders may evaluate the short-term risk that their business faces and forget the long-term risks. For instance, the risk that a competitor will outdo your business might not affect you within the first few months, but it has the ability to wreak havoc later on once the competitor’s business gains traction. Other non-obvious risks might include a shift in customer expectations, the introduction of new regulations, political issues, and non-compliance risks.
Taking control of your risk landscape is the best way to steer away from these risks. That’s why IT risk assessments are essential and can help you to take control of your risk landscape as the best way to steer away from these risks. Risk management is as easy as trying to understand your risk landscape.
Here are some details on how to approach risk management as a business:
Why Risk Management Matters
Risk management simply helps you understand your business’ risk landscape. It helps you explore the different threats, and how to protect your business against them. In a world where business resources are scarce, it also helps you examine the best ways to channel resources to expose your business to minimize risks.
This approach eventually protects the interests of all stakeholders, including customers, investors, and employees. As long as you can create a risk management framework for your business, everyone can go home happy.
✋ Warning
Here is the ultimate risk management guide with everything you need to know about business risk.
The Risk Management Process
Identify the Risks
Business leaders should create a list of the different risks that their business faces. Since there are wide categories of risk, you should focus on one before moving to the next one. For instance, you should talk about the risks that you face with regard to the market, competition, security, and even employee retention. Having a well-defined risk management landscape is the first step towards keeping your business afloat.
While brainstorming might help you identify a lot of business risks, it is wise to use other risk identification methods. You can approach experts in your field, read through past studies, conduct market surveys, attend industry-related seminars, and conduct business audits. A risk might seem trivial at first, but it can turn into a menace over time if ignored.
Related: Everything You Need to Know About Financial Risk
Risk Assessment
Once you outline your current and future risks, you should determine the possibility of the risk occurring and the impact that it can have on your business. Some risks might easily maim your business, while others will barely have an impact. You should also assess how the risks might affect your business goals and objectives.
When assessing the risks your business faces, do quantify them. As an example, you can talk about how many customers you might lose by having the competition outdo you. Create a risk register and include these quantified risks into it. Follow these steps when creating the register:
1. Create A Risk Identification Column
This column should both list the risks your business faces and define them. This is an important step in your risk management process.
2. Create A Risk Analysis Column
This column can have three sub-columns- one for the likelihood that a risk will occur, another for the impact that it can have, and the last one for the overall rating of the risk. In the end, this will help you rank the risks.
3. Create A Risk Treatment Column
This column should describe how you want to treat risk. It should have at least two columns- one to define the control you choose and another to define the treatment (avoid, mitigate, transfer, or ignore).
4. Create A Risk Monitoring Column
This column should detail the intricacies of how you treat risk. It should include information on the control status of the risk, the person in charge of monitoring it, the frequency of monitoring it, and a section for leaving comments.
Rank the Risks
In a perfect world, businesses would have enough resources to eliminate all the risks that they face. Sadly, today’s world isn’t perfect, and businesses often have to make do with the scarce resources they have. Ranking the risks your business faces is a sure way to identify what risks deserve more attention than the others.
Using a risk matrix is among the best ways to rank your risks. The matrix rates the probability of a risk happening against the impact it would have on a business. The higher a threat lies on the rank, the more focus you have to put on it. To create a risk matrix, quantify each risk in terms of its impact and its likelihood of happening. You can then place the risk impact on one axis on the risk matrix chart and the risk likelihood on the other axis.
Choosing Between Risk Treatment Options
With scarce resources, businesses have no other option but to pick their battles wisely. Ideally, there are four risk treatment options, all of which depend on the magnitude of the risk. These include ignoring, transferring, mitigating, or avoiding risks.
Risk Avoidance
This is the best risk treatment option for threats that are too tough for businesses to handle. Maybe your business doesn’t have the capacity to mitigate them, or mitigating them would be too costly for the business. For instance, the risk that your business will not manage to comply with GDPR requirements might be too high. You can avoid venturing into markets that are under GDPR to avoid this risk until you are ready enough to be compliant.
Risk Mitigation
Use this option if your business has the capacity to treat a risk without hurting other business processes. For instance, installing cyber-security controls will keep your sensitive data safe from cyber threats.
Risk Transfer
Some risks can best be handled by other businesses or organizations, instead of your in-house team. For instance, mortgage lenders often transfer the risk of customers defaulting onto insurance companies. You can also transfer operational risks by outsourcing tasks like marketing and customer service.
Ignoring Risks
Some risks are too trivial to make an impact. For such risks, ignoring them is the best option. A good example is the threat that your other startups will steal your intellectual property despite having patented it.
Monitoring Your Risk Management Framework Is Essential
Your risk landscape is bound to change regularly. You cannot always trust that the risk treatment options you chose yesterday will suffice in today’s risk landscape. For instance, if the HIPAA is updated today, you will need to revisit your control strategies to ensure that your business is compliant.
In other cases, your business’ orientation towards certain risks might change with time. As a result, it pays to monitor your risk treatment strategies and update them accordingly. Offering each risk monitoring task to an individual in your organization will improve both the success rate of the current controls and risk accountability. This can be something as simple as offering a compliance officer the role of monitoring compliance risks. Be sure to include the details about risk ownership in your risk register.
Your business will only survive in today’s harsh world as long as you can protect it from imminent threats, both in the short term and the long term. Success trickles down to how you research business threats and the treatment options you choose. Focus on creating a strong risk management framework to fortify your business against current and future threats.
