It’s no secret; half of the new businesses fail within the first five years. And most of them fail owing to the same reasons, which include poor planning, lack of market investigation, and insufficient capital. That said, how can you ensure your business survives, not just in the first five years but for many years to come?
One of the critical ingredients for business survival is risk management. A perfect business plan is great, but it’s not enough—unforeseen events can make that plan ineffective. Failure to manage risk has led to the collapse of large organizations. Many corporate leaders of such organizations become embarrassed when a business goes under due to preventable risk. What lesson is there to learn?
Since most businesses fail for similar reasons, you can learn to take preventive actions in advance. This guide will give you some risk management tips to help steer your business to success.
What Is Risk Management
Risk management involves identifying events that carry risk, analyzing them, and taking precautions. As a business owner, look ahead and identify risk-causing events in advance. Even when your business is doing fine, there’s no guarantee the future will remain the same.
The environment can change with time. For instance, there could be political unrest, emerging competition, dwindling markets, changes in regulations, high inflation, shortage of materials, plus many other unknowns. Monitor the internal and external environments to identify risky events that could negatively affect your business.
Once the environment changes, your business needs to adapt to those changes to keep surviving. If competition is growing, differentiate your products, diversify them, or develop other marketing strategies. The point is every risk has a solution. Here, your work is to identify the risk and find a fitting solution. If you don’t take that step, your business will pay for the lapse by making losses.
For instance, you can pay heavy penalties for failure to comply with government regulations. Your business can be a victim of a cyber-attack for ignoring system security. Employees can strike, and business partners can sue you for breach of contract. To put it simply, your business faces all sorts of threats.
That said, most of these threats are preventable. How? Through a continuous risk management process. Here’s why you need one for your company.
3 Reasons to Incorporate Risk Management into Your Business
Business risks vary depending on the type of organization. For instance, an e-commerce business could be more concerned about cyber-attacks than other businesses. Also, online operations face a higher reputation risk because customers rely on reviews to make buying decisions. That’s why negative reviews from several customers can significantly affect your online sales. Plus, the growing competition of these businesses can make it easy to lose customers.
But regardless of the type of business you run, risk management can help you identify and manage risk before any unfavorable situation gets out of hand.
Below are three benefits of a risk management process.
1. Helps Understand Your Business Better
Risk management reinforces critical thinking and scenario building. It makes you aware of all current and potential threats your company faces. Once you have an in-depth understanding of your business, managing and planning for your enterprise become easier. Plus, future events won’t catch you ill-prepared.
2. Guides Decision Making
After weighing the magnitude of particular risks, you can make sound decisions that benefit your business. When making investment decisions, risk management helps you determine which project to accept and which to reject based on the risk involved.
As a result, you can utilize organizational resources optimally while minimizing the organization’s level of exposure.
3. Contributes to Success
Risks are threats to business goals. And risk management means eliminating barriers to the goals. This indicates that your business is more likely to succeed if you make risk management part of your routine functions. But how can you achieve that? Below are four risk management tips to help you get started.
4 Steps to Creating Effective Risk Management
Follow these steps to incorporate risk management into your enterprise.
1. Identify the Risk
What threats does your business face? Generally, businesses face financial, legal, operational, cyber, compliance, strategic, and environmental risk, to name a few. Identify current and future events that threaten your organization. On this note, you can identify the risk based on your experience, what other businesses face, or anything happening in or outside your business that can reduce your revenue or increase costs.
2. Assess and Evaluate the Risk
Collect more information about the risk to determine the probability of occurrence and how much you stand to lose if the risk occurs. If the loss involved is insignificant, you shouldn’t worry much. But if the figure is huge, give the threat a priority.
Tip: Set your risk appetite by fixing the limits of how much loss you can withstand if the risk occurs. Prioritize any risk exceeding the acceptable limit.
3. Identify the Best Response
Identify the best response for each risk, starting with the most severe one. Typically, you can opt to reduce, accept, transfer, or avoid the risk. The type of response you choose will depend on the risk. If it involves cyber security, you can decide to limit the risk by using strong security systems.
But remember, sometimes it might be challenging to avoid the risk completely. In such a setting, you can decide to transfer it to an insurance company by purchasing an insurance policy. If you have more than one response to a risk, choose the most effective action while considering the cost involved.
4. Monitor the Risk
With time, your business will grow, and your risk appetite might change. Plus, new risks can emerge, and old ones might disappear. Whichever the case, you need to monitor your business environment constantly to identify changes. When necessary, modify your risk response strategies to keep them relevant and effective.
Grow Your Business to New Heights Through Risk Management
Even though business environments change, they do so gradually. And some of these changes are foreseeable, a situation that gives you time to prepare. Make risk management a routine activity, and this step will see to it that your business grows.
Indeed, half of the new businesses don’t make it beyond the fifth year, but yours can be different. Learn from the mistakes of others and apply the risk management tips in this guide. Once you do that, you’ll successfully steer your business to new heights.