When it comes to running a business, planning for the worst doesn't mean you’re a pessimist. It’s the mark of a business owner who knows the value of risk management planning. Still, the costs of risk management can steer cash-strapped small business owners away from devising a robust risk strategy. If that’s the case, it’s time to flip the script.
Rather than concerning yourself with the cost of implementing a risk management plan, think about the cost of not assessing and managing risk.
Benefits of Risk Management Planning
Risk management planning helps you identify and mitigate risks that could negatively affect a business.
By developing clear plans and processes, businesses can more easily respond to potential issues, ultimately helping minimize negative impact to operations, reputation, and profitability - which helps you stay competitive and helps ensure long-term success.
Here are five key benefits to implementing a risk management plan:
1. Managing Risk Leads to More Efficient, Consistent Operations
A key goal of risk management is to assess operational risks, or the potential problems that can interrupt daily operations and diminish a company’s ability to function efficiently and effectively. Planning for operational risks helps businesses mitigate disruptions and prevent unexpected delays or downtimes that would otherwise drag down productivity, reputation, or profitability.
For example, a small restaurant likely relies on certain ingredients that, if not delivered, would significantly affect its ability to operate. To manage that risk, the manager might contract with a backup supplier in case their main source faces a stockout. Now the restaurant is prepared to satisfy patrons, even if its main supplier can’t deliver.
Risk management planning helps you identify and mitigate risks that could negatively affect a business.
Risk management planning can also help companies identify opportunities to streamline operations, optimize resources, and eliminate waste. Before an upcoming holiday season, for example, a boutique manufacturing company reviews its risk management plan and identifies a production bottleneck. The company realizes it can address the inefficiency by conducting necessary equipment maintenance that puts more factory machines back on the production line. Rather than face the risk of not meeting holiday demand, the company can now produce and ship goods much faster, giving them a competitive edge at a critical time for revenue generation.
2. Risk Management Helps Businesses Identify and Avoid Unapparent Risks
Data breaches. Physical security threats. Accidental copyright infringement. Though often challenging to identify, these risks can damage a business’s operations, assets, and customer base. A robust risk management strategy that includes internal audits, reviews past incidents, and stays up to date with industry best practices can help a company uncover hidden threats and propel action – before harm is done.
Something as simple as installing a key-card entry system at the office can help a company control and track who’s entering and when. In recent years, cybersecurity best practices like two-factor authentication and security awareness training have become a must. To prevent risks like accidental copyright infringement, enforce strict policies for sourcing material – if an employee uses copyrighted work in a company blog post, your business could be liable. Instead, for example, ensure content producers are always using the business’s own images or ones purchased from a reputable licensing agency.
3. A Good Risk Management Strategy Can Help Protect Your Brand
Your brand is your reputation. A strong reputation drives more business and can set you apart from your competitors. Therefore, establishing risk management practices that protect your brand can be a significant component in your risk management strategy. To help do so, remain vigilant about the laws and regulations associated with your business and be mindful of changes that may be made to them. You can build a plan that allows you to adjust your risk management strategy to consistently remain compliant. By instating a plan that ensures you remain compliant, you help mitigate potential damage to your brand and the long and costly process associated with rebuilding it.
4. Proactively Addressing Problems Can Boost Customer Satisfaction
A primary purpose of risk management planning is to anticipate and address potential problems before they can occur. This leads to more consistent and efficient operations, which in turn ripples out to better customer experiences and increased customer loyalty.
Say a manufacturer identifies a bottleneck in its delivery fleet. The company can contract with an alternative transportation company to ensure that it meets forecasted demand. Retailers or customers are then satisfied because orders are received on time. Or, say a restaurant spots a potential food safety risk – maybe one of the walk-in coolers is running a bit too warm. To safeguard the health and safety of customers – and prevent potential food waste – employees go the extra mile, stopping prep work to move sensitive items to a colder cooler.
By preventing potential problems, these businesses are able to demonstrate their commitment to customer satisfaction and well-being. This can help them boost their reputation for reliability and build customer loyalty. Better yet, satisfied customers are more likely to publish positive reviews and inspire word-of-mouth referrals. The fewer issues customers face, the less time customer service and management teams need to spend resolving problems because, with a proper risk management strategy, they were prevented in the first place.
5. Risk Management Can Help Maximize Your Bottom Line
Risk management can improve the bottom line by helping teams identify potential opportunities, not only threats. For example, risk management plans often incorporate market trend analysis. By understanding recent consumer behavior trends, for instance, companies can uncover profitable new opportunities, whether by using a new marketing strategy, appealing to a new demographic, or launching a new product or service. But even when new opportunities seem ripe, risk management should also inspire a cost-benefit analysis. This way, you can make certain you’re putting resources into business activities worth your time.
Another benefit of risk management is that it can help businesses improve their budgeting acumen. Being prepared for business risks – and the strategies required to mitigate them – can help businesses brace for unexpected costs. With the growing prevalence of tighter budgets, such preparation gives businesses information they need to allocate resources more thoughtfully, optimize spending, and avoid wasteful expenditures. This may position the company to tackle unexpected expenses by using its own reserves – without taking on unnecessary debt.
The Bottom Line
Risk management, a necessary protection for any business, makes it easier to proactively respond to risks. With sound risk management planning, businesses minimize their exposure to financial losses and can make more strategic decisions that ultimately maximize their bottom line. Though implementing risk management strategy comes with its own cost, forgoing a plan isn’t worth the risk. Being prepared puts businesses, no matter how small, in a better position to stay competitive and enjoy long-term success.
A version of this article was originally published April 23, 2018.
Photo: Getty Images
