In today’s volatile business environment, the most successful companies are not those who haven’t faced issues, but rather those who have learned from the issues they’ve faced to become stronger.
When an unforeseen event negatively impacts your business, having a comprehensive risk management strategy in place increases your chance of survival. An effective business risk management strategy can not only minimise the damage caused but also accelerate your company’s ability to recover.
What is Risk?
To put together an effective risk management strategy, you must first understand the concept of risk. Business Risk can be defined as the possibility of your business, or business division encountering an unintended negative circumstance.
Every business operates with a certain amount of risk. However those that effectively accept, transfer and mitigate these risks are more likely to thrive than those try to avoid it completely. Knowing what risks to take and which to avoid is key, and that’s where risk management comes in.
What is Risk Management?
Risk management is the process of identifying and minimising the risks that your company is exposed to. Effective risk management involves:
- Identifying risks faced by the organisation
- Assessing the size and likelihood of each risk
- Applying risk-management strategies to minimise risk
- Ensuring everyone in the organisation adheres to risk management strategies
Identifying Business Risk
First and foremost you have to identify the specific risks that your business is exposed to. These risks can be classified in the following areas:
Financial: Loss of investment or lower than expected ROI.
Currency: An investment or payment losing value due to currency fluctuations.
Credit: Not receiving payment for goods sold on credit.
Security risk: Threat of fraud, theft, embezzlement, or misdirection of funds.
Property: Damage to or loss of business property as a result of fire, flood, earthquake, storms or terrorism.
Legal: Facing legal action from customers, suppliers, employees, competitors, investors, or other parties.
Technology: Misuse or breach of company IT systems.
When considering the risks most likely to affect your business, you should ask yourself the following questions:
- What are the general risks faced by business owners today?
- Specifically, what is likely to go wrong in with my business?
- What external circumstances am I most likely to be affected by?
Measuring Business Risk
Once risks have been identified, the potential effect on the company should be measured, including direct financial losses and any possible effects on customers, employees, suppliers and stakeholders.
In order to do this, the business can draw upon internal and external data. Certain types of risks such as financial and credit risks can be forecast using pre-collected company information, however evaluating the likelihood of other events, as well as their potential consequences can be much more difficult. An economic downturn, natural disaster, industrial accident, or terrorist attack fall into the category of risks that are almost impossible to predict.
These harder to predict circumstances are often overlooked by managers, however it’s important to remember that even though a risk may be considered “highly unlikely”, it is not impossible. Often, it is these unpredictable risks that can have the biggest financial impact when they do occur.
In Conclusion
Managing risk is not simple, but it’s an important aspect for the ongoing success of your business. As a business owner, it’s important to have an understanding of the risks you are exposed to, and speak to an experienced professional who can help you implement the most effective risk-reduction strategy. Call your PSC insurance broker today for a confidential discussion.
Conditions apply for each policy and the information expected from you for a policy to trigger. Coverage may differ based on specific clauses in individual policies. Please ask your broker to explain the additional benefits and exclusions pertaining to your policy.
The information provided is general advice only and does not take account of your personal circumstances or needs. Please refer to our financial services guide which contains details of our services and how we are remunerated.
