Every business enterprise takes risks. Even if a business owner decides not to take any risk, the very existence of the business is a risk. That is why all businesses including SMEs need to adopt a risk management plan to cater adequately for business risks.
Risk management is the process of identifying, assessing, and controlling threats to a company's goals and objectives. These threats, or risks, could arise from a variety of sources such as financial, legal or management errors, accidents/natural disasters, IT security threats, data-related risks, and so on.
The following are some useful tips that can be applied ahead of time to help business owners manage the risks that can arise when running a business.
Determine your risk appetite or threshold
What types of risks are you not willing to accommodate as a business? This is the starting point. Common examples include any risks that can endanger employee safety, damage your reputation, or knowingly contravene a law or regulation. This creates a guide or boundary and is referred to as your risk appetite or threshold. It is important to establish this up front.
Identify and analyze risks
Seek to identify both likely and not-so-likely risks to your business. Estimate the (financial) impact on your business of each threat occurring. This provides you with the basis to assess or categories these risks based on the likelihood of occurrence and the impact of occurrence. The information generated will help you plan your response to the threat, which involves avoidance, mitigation, or transference.
Avoid avoidable risks
If your company has zero appetite for a particular type of risk, it is best to avoid it. When you decide to avoid risk, you effectively eliminate the possibility that the risk will pose a threat to your business. To avoid certain financial risks, an SME could avoid accepting high-risk customers/clients. Another example of risk avoidance is deciding to stop offering particular products or services. In many cases, it takes courage and conviction to make decisions like these.
Mitigate/reduce the likelihood or impact of the risk
Mitigation is another option for managing risks. This means taking action to reduce the likelihood of occurrence or impact of a loss. A common way for SMEs to mitigate financial risks is to require two signatories for cheques above a certain amount
Segregation of duty, i.e. having one person handle the cash and another person balance the books, is another commonly used risk mitigation method.
Transfer the risk to a third-party
Another way to manage risk is to transfer the risk to a third party. The most common method for transferring risk is purchasing insurance. Make enquires about liabilities and legal regulations to help you determine what types of insurance will be suitable for your business. The types of insurance include professional insurance, disability insurance, and life insurance. The important part of purchasing insurance is that you can transfer your SME risk to insurance companies at a small cost (a premium), as against the potential cost of handling the full impact of risks if it occurs all by yourself.
Risk management is an important step for your SME to attain sustainable growth. The tips discussed above can help you create a viable risk management plan. A risk management plan should change as your business or environment change, which is why consistent monitoring of known and emerging risks is important to ensure you are making the right decisions.
Contact me if you need risk management help with your SME.