All businesses, from startups to well-established ones, face a range of factors that may affect their ability to achieve their mission and objectives. While avoiding risk completely is difficult and often not possible, a variety of risk management strategies can minimize the negative impacts on the business.
To help business leaders understand their risks, four entrepreneurs and risk experts offer their insights into what risk management is and how to plan for risk.
Business Risk Management Definition
The Corporate Finance Institute, which provides training for banking professionals, describes risk management as encompassing “the identification, analysis and response to risk factors that form part of the life of a business.” Simply put, business risk management is the process of proactively addressing the factors that could prevent the business from achieving its goals.
“Business risk management is about taking an outward look toward your environment and an inward look toward your own business to understand what could go wrong and how to prevent it,” says Hind Abdo, who has worked in risk management within financial institutions for 17 years before recently launching her own Montreal, Canada-based firm, Facultas-Risk Consulting, to provide risk management services for small and medium businesses.
“Have conversations with the stakeholders about what they feel are the largest risks to the business. [...] Consulting with employees is especially important for getting them on board once you implement your strategy.” —Hind Abdo, founder, Facultas-Risk Consulting
The benefits of risk management in business range from improved financial health to increased customer satisfaction.
“As a business, we don’t evolve in a vacuum – we evolve in a business environment that changes every day,” Abdo adds. “It’s important to manage risk because it can distract the business from achieving growth and their business goals, and can lead to business failure altogether.”
Types of Risks Your Business May Face
Understanding what types of risks your business faces helps ensure that your risk mitigation strategies and plan focus on the most important risks. While the types of risk vary from business to business – depending on factors such as company size, industry, business model, types of customers, and location – these are some of the common categories:
- Operational risk: This includes anything that impacts daily operations, from staffing to supply chain shortages and business interruption. A global survey of 2,712 risk professionals by insurance and asset management group Allianz found that cyber risk and business interruption ranked as the top business risks for 2023, and cyber was also the main concern among respondents from small- and medium-size companies. “Cyber risk is especially a growing concern because events like data breaches and ransomware attacks can threaten the survival of the company or cause huge financial losses and business interruption,” Abdo says.
- Execution risk: Unlike the ability to “keep the lights on,” execution risk relates to activities focused on growing the business, explains Mike Davis, an entrepreneur who has founded more than a dozen businesses and is the founding partner of Olive Tree Ridge, an asset management firm and investment bank focused on removing barriers for women and immigrants. “You may have state-of-the-art facilities, unlimited budget and the most competent staff to run operations, but if you’re adding new products and services or expanding to new markets, you may not be able deliver if your execution path is risky.”
- Financial risk: From liquidity to economic conditions and even regulatory fines, numerous factors can affect your company’s cash flow and result in loss of capital. For a startup, even a legal change, such as a co-founder exit, can bring financial loss. This was the case for BoxHero, an inventory management technology company that is headquartered in Seoul, South Korea, and recently opened a U.S. office. “As an early startup with limited budget, we didn’t ask for expert help with reviewing our legal documentation, which in the end caused a bigger financial loss and an operations halt,” explains company CEO Heehong Moon. “Our success today is a result and byproduct of our challenges along the way, but it's important to get ahead of them as quickly and early as possible.”
- Reputational risk: Brand reputation impacts the way your company is perceived not only by customers but also employees and other stakeholders who are essential to the success of your business. A 2022 business risk management survey of 722 U.S. business executives by PwC found that building and maintaining trust is increasingly important, with 65% of executives saying they’re focused on refining their trust strategy in the next 12 months.
- Natural catastrophes and disasters: Events such as fires and heat waves can impact employee safety and disrupt operations. Abdo, the risk management consultant, says climate change is one of the most underestimated business risks. “Floods, wildfires and other natural events can interrupt not just your business but the operations of the suppliers you depend on,” she says.
Business Risk Management Techniques
Risk is an inevitable part of doing business – in fact, taking calculated risk is how many companies grow.
“The biggest risk for startups like us and other growing businesses is to not take any risk at all,” says Simon Bacher, co-founder and CEO of Ling, a Chiang Mai, Thailand-based technology company that offers a language learning app for about 60 languages. “But we have to prepare for potential problems and the steps to fix them.”
Common techniques for risk management in business include:
- Avoiding risk: Although this is often the least attractive, it could be a good strategy for big risks, Abdo says. “For example, a lot of insurance companies right now don’t offer cyber risk policies because they would have to price them very high for their customers due to the cybersecurity threat environment,” she says.
- Controlling risk: Control measures, which range from processes and procedures to technology, can help prevent risks. Requiring two signatures on checks, monitoring employee access to sensitive data and installing fire sprinklers are examples of controls for different types of risk.
- Transferring risk: Typically, businesses transfer risk through insurance policies, but Abdo notes that other approaches to transferring risk include contractual clauses, such as an indemnity clause.
- Accepting risk: How much risk you accept depends on your comfort levels and your risk appetite. “You can accept risks that don’t threaten the survival of your business,” Abdo says. “For example, risk like small bad debt is part of doing business, but you can accept it because it doesn’t happen on a large scale.”
Davis, of Olive Tree Ridge, says whatever techniques business leaders choose for managing risk, it’s important to keep it simple. “Avoid going down a rabbit hole and spending thousands or even millions of dollars just so you can say you have risk management,” he says.
How to Create Your Business Risk Management Plan
For smaller companies, managing risks may be as simple as embedding risk evaluation and response steps into the standard operating procedures (SOPs). That’s what Bacher does for Ling, which employs about 55 people as well as many contractors. “Since we’re relatively small, managing risk as part of our SOPs, rather than a separate plan, has been very effective,” he says.
Although a business risk management plan may be more of a long-term activity for startups, Abdo highly recommends it because it can help anticipate your highest risks and response steps. Typical actions covered in a plan may include:
- Evaluating the company’s biggest strengths and weaknesses, as well as opportunities and threats (a SWOT analysis)
- Identifying the various types of risks the business is vulnerable to
- Prioritizing the risks based on which ones are the most likely to occur and which of those would have the highest negative impact on the business
- Responding to the identified risks using risk management techniques
- Monitoring the risks and reevaluating them as the environment changes
Engage your stakeholders in the planning process, Abdo recommends. These may include the company founders, employees, and family members if the business is family-owned.
“Have conversations with the stakeholders about what they feel are the largest risks to the business,” she says. “Consulting with employees is especially important for getting them on board once you implement your strategy.”
Although many businesses review their plans on a set cadence, it’s also prudent to do it when there’s a big shift in the business environment, whether it’s a drastic event such as a global pandemic or a more common occurrence such as a downturn in the economy.
BoxHero’s Moon also adjusts his strategy based on lessons learned. For example, after the losses due to the co-founder’s exit, the company began hiring legal experts to draft contracts. “I learned from experience,” he says.
Why Is Risk Management Important for Business?
The consequences of ignoring business risks can be costly, ranging from financial losses to business failure. Examples include:
- Noncompliance fines
- Theft and fraud
- Loss of sales
- High employee turnover
“Although the outcomes can be catastrophic, the more common implication of ignoring risk is stunted growth in the business,” Davis says. “The positive consequences of having risk management dialed in – to whatever degree you feel comfortable – is the ability to take calculated risk with a more informed view of what the rewards should look like.”
Moon emphasizes that it’s important to not dismiss a risk offhand just because it feels insignificant. For example, one single customer complaint can snowball in this age of social media. “It’s a very competitive landscape and you can’t overlook small things that can lead to bigger risks,” he says.
While risks are inevitable, preparing for them helps ensure that your business remains healthy and continues to grow. But don’t think of risk management planning as simply an activity that results in a documented step-by-step process. Embedding risk into your company culture and involving employees at all levels is an equally important part of a successful strategy.
A version of this article was originally published on April 16, 2018.
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