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Risk management is a process in which businesses identify, assess, and treat risks that could interfere with and disrupt their operations. Learning and implementing risk management is crucial for the success of a business.
Effective risk management can help businesses protect their assets, make better-informed decisions, avoid mistakes, secure financing, and more. That’s why learning to assess risks and implementing strategies for them is crucial for business growth and success.
While a Master of Business Admin online can prepare you for handling risk management when running a small business, it’s always important to have a backup plan. It’s always important to have a contingency, whether it’s an issue like data loss, staff resignation, or stock delays.
In this article, we’ll discuss the importance of a backup plan and why effective risk management is crucial. If you haven’t already started implementing risk management measures, the next best time is now.
What is a risk?
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A risk can be defined as an event or circumstance which could negatively impact business operations. In the business world, it’s important to not confuse risks with hazards. They are distinct, and while connected—they have different meanings.
A hazard is a source or situation that can cause human injury, damage to property, damage to the environment, or a combination of these. For example, this could be moving machinery like a forklift.
On the other hand, a risk is the chance of something happening that could negatively affect the business. While a risk could be about physical harm or damage to property, it could also be financial or reputational.
Identifying & controlling risks
When identifying and evaluating risks, they are usually categorised into levels based on the likelihood of the event happening and the potential consequences of the unwanted event. There are also several types of risks, including;
- Opportunity-based risks: This type of risk refers to the risk of taking one opportunity over others. For instance, changing suppliers or selling a new product.
- Uncertainty-based risks: This type of risk is from the uncertainty around unknown or unexpected events. For instance, unexpected financial loss or a natural disaster. This is hard to control and predict.
- Hazard-based risks: This type of risk comes from dangerous situations in the workplace. For example, chemical hazards from improperly storing flammable or toxic chemicals. They are typically easier to control.
An important part of the risk management process is implementing ‘controls’. Controls are steps businesses put in place to decrease the likelihood or chance of a risk happening or reduce the impact if one occurs.
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Why manage a risk?
Whether you’re running a small business or own a massive organisation, risk management is critical for success. By managing risks, businesses can reduce the chance of unexpected events and their impact if they happen.
Managing risks can help with:
- Improving relationships with involved parties, like employees, suppliers, and consumers, by understanding and managing their expectations.
- Improving staff confidence in their workplace, through workplace health and safety (WHS) measures and planning.
- Keeping business operations running through crises, like natural or economic disasters, through emergency management plans.
- Reduce insurance and compliance costs due to lowering the risk of damages.
Risk management is also important when taking opportunities to grow a business, too. Proper control and measure implementation reduce the impact of unwanted outcomes and increase the likelihood of success.
Thorough strategy implementation, controls, and measures can help reduce the impact and increase the chance of success with opportunity-based risks, too.
Risk management scenarios
A huge part of risk management is coming up with backup plans and strategies in case an unwanted event occurs. For example, emergency management plans can help with uncertainty-based risks like natural or economic disasters.
While it is impossible to always predict and avoid risks when running a business, backup plans make it possible to always come out with the best-case scenario. Below, we’ve outlined common risk scenarios small businesses face and how to handle them.
Data-related risks
We currently live in a technology-driven society, and that’s true for businesses, too. Data is crucial for all businesses, powering everything from customer relationships to financial management.
Data-related risks like accidental deletion, hardware failures and threats are a risk for almost every organisation. Below, we’ve listed steps you can take and incorporate as a backup strategy to reduce the likelihood of it happening.
- Local and cloud backups: To prevent accidental deletion and hardware failure, off-site local hardware and/or cloud backups can minimise risk.
- Implement strict authorisation: Implementing strict authorisation to access and manage data can help reduce the risk of accidental deletion and cyberattacks.
- Data encryption: Encrypting sensitive data both during the transfer and at rest to protect against unauthorised access can help reduce the risk of cyber threats.
Uncertainty-based risks
As we’ve seen with the COVID-19 pandemic, you never know when a natural disaster or economic crisis can hit. It’s always important to be prepared for uncertainty-based risks, even if you can’t predict them or their impact.
The best step to take for tackling uncertainty-based risks is to always have a comprehensive emergency management plan that can be readily implemented. Especially in Australia, where fires and floods are common.
When it comes to emergency management plans, we recommend focusing on three key areas:
- Create a continuity plan, identifying critical risk areas of the business if a natural disaster were to occur, protect staff, and keep operations running.
- Put together an emergency action plan, so you and your staff know what to do during an emergency.
- Create a recovery plan to guide your business’s recovery after an emergency occurs.
Along with these plans, it’s also critical to put emergency funds in your business’s budget in case something happens. The last thing you want is an uncertainty-based risk also turning into a financial disaster.
