Business Risk Management:
What to Know
“Fortune sides with him who dares” — Virgil would have made a great businessman, right? Risk is an unavoidable part of business, both in the beginning and throughout (but mostly in the beginning). It’s hard to know how much risk is too much risk, especially if you’re a new startup or work in a creative industry. That’s why business risk management is vital to every business strategy. You should understand what you need to succeed and how to mitigate any obstacles on the way.
But just because a business move is risky doesn’t mean you shouldn’t do it. Proper risk management just helps you weigh the scales — we discuss this with many of our clients through our business consulting services. Let’s get your feet wet with a breakdown of the ins and outs of business risk management.
Table of contents
What is risk management in business?
Business risk is any exposure or vulnerability your business faces in the pursuit of growth and profits. Business risk management attempts to avoid or reduce exposure to any identified risks your business faces.
In this case, vulnerability is a path toward failure, whether through decreased profits, reduced customer satisfaction, or other setbacks. For example, an investment in new tech could lead to more efficiency in the long run, but the big capital expenditure might hurt your current day-to-day activities and interrupt operations. But you could take risks in other areas, too.
Say you’re a film producer. An abandoned film set might save you thousands on event space rentals, but it also poses the risk of employees or contractors falling — we smell a lawsuit coming. This is not only a threat to your finances; your business’s reputation is also on the line.
Let’s look at other forms of risk in business:
Types of business risk
Strategic Risk: Do you ever deviate from your business plan? That’s a strategic risk that could reduce your business’s operational efficiency. However, pivots are sometimes necessary to meet changing customer needs and shifting markets. This type of risk also encompasses any problems that may arise from implementing a new strategy.
Perhaps you’re a skincare brand that introduces hair-loss products to your offerings. That’s a pretty big jump from your original business model, but with the right research, prep, and expertise — it could be a strategic risk that brings more revenue! Other strategic risk examples include high staff attrition or turnover, market changes, or IT issues.
Security risks: Cutting corners in IT or cybersecurity budgets? You might save a few dollars this quarter, but it won’t matter if you’re the victim of a data breach. Strong SOPs regarding building access also prevent security risks.
Legal or compliance risks: Every business faces legal wrath if they don’t follow the law, including tax laws. Compliance risks are more common for highly regulated industries, such as airlines, financial lenders, and medical businesses.
Reputational Risk: You might not care about what people think of you, but you should care about what your customers, vendors and employees think about your business. Reputational risks are any actions that could jeopardize your good favour with your customers and the public. It could be anything as small as an unaddressed complaint, or as big as a partnership with a questionably moralled company.
Say you’re a sleek startup app connecting pet sitters and pet owners. A no-show sitter might not feel like your problem, but no action on your part will surely result in an angry user (the dog owner). They’ll go blabbing on social media. Our impression? One bad review could hurt some businesses more than others. The reputational risk here seems low, but it really depends on each specific scenario.
Another example is Chick-Fil-A CEO Dan Cathy’s comments opposing same-sex marriages. In 2022? That feels like a pretty big risk to brand loyalty, especially from LGBTQ patrons.
Operational risk: These include any risk to your day-to-day operations. For example, minimal investment in training could result in lower productivity and a domino effect of customer dissatisfaction and decreased revenue, which then becomes a financial risk.
Competitive risk: This is a risk that could see your customers choose competitors over your business. For example, releasing products similar to another big player in the industry could pose a competitive risk.
Financial risk: Let’s face it, starting and operating a company costs money. As an entrepreneur or business owner, you bare almost all financial risk, unless you have investors or lenders involved. But even then, your investors and lenders are taking on financial risk and you’re a part of that too. Money is the lifeline of business so it’s important to consider risks that could impact your finances. Cash flow, accounting, payment terms, debt management and more all feed into how financial risk is managed.
Related Reading: 14 Business Terms Every Entrepreneur Should Know
Risks of a new business
Have you ever tried to get a loan in your first few years in business? Chances are, A-level lenders wouldn’t budge — they want to see two years of regular income. Why?
Because even if you have revenue flowing in year one, the early stages of business are always the riskiest. Unfortunately, 20% of businesses fail in their first two years. On top of that, only one-third of startups deliver positive returns.
Luckily, the risk tends to decline over time as you become more knowledgeable, comfortable, and reputable. In addition, as you become more experienced, business risk management develops as a skill. You get better at identifying risks and mitigating them. Still, the story goes no risk, no reward.
Benefits of risk-taking in business
- You inspire your staff and customers. If you take risks to achieve your business goals, you make it clear that you stand behind your product.
- You scale. You can’t expand your business without taking any risks. Of course, they should still be calculated, educated risks. But nobody grows without some risk tolerance. Look at Elon Musk, who neared bankruptcy to save and expand Tesla and SpaceX.
- You become resilient. Have you ever put off something uncomfortable? Entrepreneurs face discomfort head-on, and studies show this assertiveness makes us more resilient and capable of bouncing back from difficult experiences.
- You innovate. If you try something no competitor has ever done before, you have no history to go on. All you have is a market need and your gut. Risk-taking helps you innovate and find novel solutions to support your customers.
Drawbacks of risk-taking in business
The drawbacks of risk-taking are the results of each risk manifesting. These could look like this:
- Loss of profit or financial hardship
- Reputational damage
- Displeased employees or investors
- Legal implications
The good news is you can bounce back even when the worst of the worst happens. Entrepreneurs and business owners, even the most experienced, make mistakes all the time. It’s more so about how you handle them!
Related Reading: When should I incorporate my business?
Why is business risk management important?
Risk management helps you mitigate tolerable risks, assess their impact, and eliminate risks that pose too much potential damage. It’s the only way to prepare for any events that could hurt your business profits and growth. Plus, it improves your chances of succeeding for many years. In many cases, business risk management equates awareness. It’s information you use to protect your operations, time, and revenue.
Experts also say that risk management is more important now than ever due to increased risks pumped by technology and globalization. Remember COVID-19? Of course, it’s hard to prepare for events like that, but that doesn’t mean you can’t survive them.
Lastly, a contingency plan never hurts a business. So, how do you go about creating one?
How to manage risk in business
Businesses have a few courses of action to manage risk. Here are some common methods to manage risk:
- Avoidance: You could simply avoid the path that poses risks to you. For example, you could avoid discussing customer questions that could be divisive on your social media channels. Similarly, you could avoid investing in new technology that demands a large capital investment, or securities you’re unfamiliar with. A common example could be a wealth management firm that doesn’t invest in cryptocurrency.
- Sharing: The negative blow of one risk might be easier handled if you share it with someone else. This is often why some people go into business in partnerships. More resources equal more business risk management strategies!
- Transferring: You might transfer risk to another party by purchasing their services. For example, an employee might transfer the risk of a harsh market onto an employer by signing an employment contract. Similarly, a property owner might transfer the risk of nonpayment of rent to an insurance specialist.
- Retention: This is simply accepting the risk as a condition of doing business. For example, a restaurant might increase its prices to manage its expenses better. As a result, they risk some dissatisfied or lost customers; however, the risk of not increasing prices might be more costly.
- Prevention: This involves managing the risk rather than trying to eliminate it. You can prevent the impacts of certain risks through a robust risk management strategy.
Here’s where you can start:
What is the risk management cycle?
The risk management cycle helps you manage risks that arise in your business. Here are the cycle’s five steps:
- Identify: What is the risks involved in any business decision? You might meet with your management team or team to brainstorm potential risks to your business. Organize the risks into a list based on perceived severity.
- Assess: What type of risk is it, and what could its potential impact be? Think about what causes the risk in the first place and try to eliminate it at its root. If that’s not possible, you must understand exactly how it could hurt your business. You should also know what the potential rewards could be!
- Treat: Establish measures and processes, including a contingency plan, to minimize the risk. Or, eliminate the risk altogether. Either way, you and your company should have a solid path forward if the risk presents itself.
- Monitor & Report: Collect data and record any risk activity. Create regular reports, including visualizations, to update all executives and stakeholders with any risk developments.
- Repeat: Keep up the good work!
Risk Management and Your Business
Bottom line? You can’t escape risk, but you can manage it. Think about new risks to your business as time goes by, as new audiences, market conditions, and world events could transform risks and add new ones to your radar.
And if you need a helping hand? Creative Clan can help you with a data-informed, expert risk management plan. Get in touch!
Read More: What is a business plan?