How to Manage Risk in Business : When the market undergoes a downturn, the need for risk management is greater than ever. An unexpected event can destroy your business in one swoop if you lack the tools to effectively manage that risk.
Internal risks include information breaches, non-compliance, lack of insurance, growing too fast, and many more. External risks may be out of your control as well as interest rates, exchange rates, politics, and weather.
Managing risks is one of the areas in which business owners can focus to manage the risks that come with running a business.
It is important to prioritize risks or threats in any risk management plan. You can do this by using a rather universal risk/threat scale:
- Very likely to occur
- Some chance of occurrence
- Small chance of occurrence
- Very little chance of occurrence
Of course, a risk in the highest category should take precedence over other risks, and a plan to prevent, or at least mitigate, them should be in place. However, there is a catch. One should prioritize risk that presents greater risk to financial security.
2. Buy Insurance
Determine what type of insurance is best for your business based on its liabilities and legal requirements. This may include:
- Insurance for life
- Insurance protection for disability
- Insurance protection for professionals
- Insurance for completed operations
Insuring yourself is a great way to transfer a risk to an insurance company at a tiny cost, especially when contrasted with the potential cost of not being insured.
3. Limit Liability
You can limit your liability as a sole proprietor by changing your business into a corporation or limited liability company (LLC). When you set up a corporation or LLC, you are not personally liable for the business’s debts or other obligations.
4. Implement a Quality Assurance Program
It is paramount that you establish and maintain a good reputation in order to ensure success. Customer service is also important. Test your products and services to ensure the highest quality. By testing what you’re offering, you will be able to make necessary adjustments.
5. Limit High-Risk Customers
When you first begin your business, it’s wise to implement a rule that requires customers with poor credit to pay ahead of time, which will prevent complications further down the road. However, you must first identify poor credit risks well in advance.
6. Control Growth
The secret to creating a good reputation for your company can be as simple as training your employees to focus on quality and not quantity. And you won’t run the risk of disappointing customers due to high-pressure sales tactics.
However, there is a danger in constantly innovating. If you can only rely on the next innovation for growth, your company will experience a crisis since not all new products and services will succeed.
7. Appoint a Risk Management Team
You can consider appointing current employees to head a risk management team if you want to save capital by not having to hire an outside firm. However, this would only be worthwhile if someone on the team has strong risk management skills and can act as a leader.
In any other case, you should consider spending money on a third party risk management team. Such professionals will be able to map out all the risks and threats to your business based on your particular industry and make plans for mitigating those risks almost immediately.
The Bottom Line
Risk management is an insurance policy in itself and essential for sustained success. The seven steps above provide a starting point, but they are just that — starting points. Deeper research into your business and industry can help you craft a risk management plan that could save your business. Also Read What Are the Real Risks to Your Business