Managing Risks

Posted:

Comment

Are you aware of all of the risks your small business has? Have unforeseen things happened that in hindsight could have been prevented? Are you taking prudent risks to try and grow your business? Small businesses that take and manage their risks are more likely than those who try to avoid taking any risks at all. The key is knowing what risk you face, and having a plan to manage them.

Risk management in the corporate world gets a lot of attention from management, especially publically-held companies where the board of directors want to know exactly what risks the company has, and how these risks are being managed. It should be no different for a small business, just on a smaller scale. Small business owners can generate significant value just by understanding the risks they face, and avoiding those that would be game changers.

Risk management starts by performing a “risk assessment.” A risk assessment helps determine both the quantitative and qualitative value of risks related to a concrete situation and a recognized threat. The quantitative side of risk management evaluates both the magnitude of the potential loss associated with the risk, and also the probability of it occurring. Qualitative risks deal more with factors that could tarnish your company’s reputation.

There are many risk categories that need to be assessed. They include compliance risks, like ensuring you are complying with labor and tax laws; financial risks associated with financing, cash flow, and your sources and use of funds; operational risks, such as your reliance on vendors and your supply chain to provide you with products; and strategic risk, which focus on how your strategy will be affected by competitors and the demand for your products and services.

Once a risk assessment is performed and you have documented an inventory of all of your major risks, you can begin to prioritize the ones you need to focus on and manage. Ongoing monitoring is part of this process as risks that come up should quickly be mitigated and resolved. There are many software tools that are available to help you with this process. Enterprise Risk Management (ERM) systems automate the process of identifying, prioritizing, monitoring, mitigating and measuring your risks on an ongoing basis.

Risk management will not only allow you to manage downside risks, but also help you to identify risks, that if managed, will allow you to create value for your small business. Understanding what your risks are and having a plan to monitor and mitigate them will help you to grow your small business.