Risk management in business has always been important, however the last year has highlighted just how crucial it is to the maintenance and success of your business.
Every business and organisation faces the risk of unplanned and unexpected events that can harm their business, cost them money or even cause closure.
Risk management allows your business to prepare for the unexpected, by minimising the risk, and creating contingency plans for if and when the worst happens.
Despite this, in 2019, only 36% of organisations had implemented a formal risk management program, according to the Disaster Recovery Journal. The same report also stated that 62% of companies experience a critical risk event in any three-year period.
That really puts the importance of business risk management into perspective and shows that while most companies are facing risks on a regular basis, they aren’t taking the appropriate risk management measures.
Unfortunately, a lack of risk management can cause expensive and potentially catastrophic problems for your businesses. Therefore, risk management is an extremely important part of your financial strategy.
This blog discusses the definition of risk management, the importance of risk management in business and how to implement effective risk management within a business.
What exactly is risk management for business?
So, firstly let’s look at what exactly risk management for business is…
Simply put, a risk is an event or circumstance that has a negative impact on your business operations, and that could ultimately cost you money.
The risks that face your business may vary depending on industry, however the five most common risk categories are:
The nature and extent of the risk faced within each of these categories will depend on your individual business, however they should all be considered.
Therefore, risk management is the process in which your business identifies, assesses and minimises these threats and challenges. This includes risk prevention planning as well as essential insurances as there are always things out of your control.
In the end, risk management is a highly individual strategy that will vary from business to business and you must evaluate how much risk you are prepared to take.
However, it’s important that you have plans in place for when things go wrong.
What is the importance of risk management in business?
So, why is risk management such an important concept for your business to invest in?
Let’s look at the five most common risks from above and look at the how and why planning and minimising each of these risks will be beneficial to your business.
1. Strategic risk management
You might have a business plan, however if the last 18 months have taught us anything, it’s that change, and critical events cannot always be predicted. And even a strong business plan can very suddenly become outdated, and irrelevant.
This is what is known as strategic risk, it’s the risk that your company’s strategy will become less effective and as a result you will fail to meet your strategic and financial goals.
A classic example would be Blockbuster, who one has an almost monopoly over VHS and DVD rental, before being knocked off the top spot by streaming platforms such as Netflix and Amazon Prime.
However, it’s certainly a risk that will have hit closer to home for many businesses over the last 18 months, as lockdown rendered their traditional avenue of income ineffective.
This is why it is important to holistically evaluate your business, and minimise the risk of potential disruptions or technological advancements.
Not everything can be planned for, but risk management can help prepare a business for rapid action in difficult circumstances. Preparation is key for any business to adapt to potential impacting events, whether that be political changes, technological developments, and financial collapses.
2. Compliance Risk Management
The laws and regulations around your business can often feel overwhelming.
Of course, it’s essential that you adhere to them, or else you are opening yourself up to lawsuits & criminal negligence.
While you might be adhering to all the current regulations, there is the risk that the laws will change. Or if you expand your product line, or the countries that you sell within you’ll likely have additional regulations.
Law changes may also have a strategic impact that could impact or eliminate the future of your business. For example, in the 1990s, music-streaming services that infringed on copyright were unable to continue.
So, it’s important that you stay on top of any risk that legal, and compliance may present.
3. Operational Risk Management
Most of the risks that impact your business are down to external events, however the internal factors with your business also present a risk.
Operational risk is essentially an unexpected occurrence within the day-to-day running of your business.
It could be caused by an external factor such as a problem with your website host, or even a natural disaster that prevents you from running your business.
However, it could also be caused by an internal mistake, or wrongdoing.
For example, a member of staff may send the wrong amount of money via online banking, or you may encounter deliberate fraud within your business.
Both of these could be avoided by having a more secure payment process, or requiring the authorisation of two members of staff in order to make payments.
4. Reputation risk management
Risk management should not be exclusive to the internal workings of your business. A lack of risk management procedures could put your business’ reputation on the line.
For example, a gap in technological risk management could leave your business open to data leaks, potentially destroying its reputation.
In an increasingly digital world, a bad reputation is becoming more difficult to bounce back from and so it’s important that you manage all your other risks to avoid gaining a negative reputation.
5. Financial Risk Management
And finally, there is financial risk management. As a financial business, this one is really close to our hearts and we are passionate about ensuring that small businesses and entrepreneurs have evaluated the risks and prepared a plan to minimise the financial impact of any risks.
Risk management is exceptionally important, as when a risk occurs, it is likely your business will face legal costs, damage repairs, profit loss, increased expenses or even all four.
Dealing with a critical event without risk management in place can be ruinously expensive and businesses can find themselves in a negative cash flow spiral.
On the other hand, with appropriate risk management in place, your business can limit these costs drastically. You can foresee where costs might be incurred and plan effectively.
Beyond the avoidance of additional costs, financial protection also expands to risk management within internal financial processes. A thorough risk assessment of exposure to bad actors and prevention strategies to tackle financial risks associated with them is imperative. This ranges from software protection against data attack up to considerations of political effects on international transactions.
How to implement risk management in business
Risks are constantly changing in modern business, particularly concerning our increased reliance on technology.
Risk management has improved alongside our innovations and is now a large sector within its own right.
There are many ways to implement risk management in business, but however it’s done, there are key steps to keep in mind.
1. Appoint a dedicated risk management team
Risk management is easily put on the back burner unless your business has a specific, appointed team to work on it. The structure of a risk management team will depend upon the business’ size, industry, and logistics.
For small businesses, this will be one appointed individual, while larger companies may have a team of people or even outsource.
Having a specific appointed person or team to concentrate on risk management will help your business implement a strategy and keep it current.
2. Monitor and review continually
SafeWork Australia has outlined four key steps to effective risk management:
- Identify risks
- Assess risks
- Control risks
- Review control measures
This is a valuable model, and importantly it’s circular, meaning these steps are repeated regularly.
Without regular monitoring and reviewing of risks – and the business’ risk management strategy itself – leniency could cause mishaps for your business that are otherwise avoidable.
3. Carefully consider financial decisions
Finance is a risk that all businesses have. At its most basic, each business has its incomings and outgoings.
Choices over financial technology, company bank of choice and international payment processes are critical, and it is essential to do your research to ensure that you partner with a reputable company.
PayPugs is an international company with expertise in international transactions, anti-money laundering requirements and Banking as a Service (BaaS).
Book a meeting with our friendly team to find out how PayPugs can help you manage your money.