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What is Risk Management?

All business activities come with some degree of risk, and managing that risk can mean the difference between success and failure. Knowing how to develop and implement risk management strategies is an essential part of the managerial requirements and responsibilities for running small-to-medium size businesses.

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The definition of business risk

Business risk is a company’s exposure to anything that could lower profits, prevent goals from being reached or cause a complete business failure. Business risk can be internal or external, and they have causes ranging from management decisions to changes in consumer behavior.

External business risks include natural disasters, such as hurricanes, floods or fires. Cyber attacks are another external source of business risk, and 48% of small-to-medium size businesses say they would have to shut down completely if hit by a major data breach.

Internal business risks may include bad decisions by management or employee behavior that threatens your reputation.

What is risk management and why is it important?

While it’s impossible for a company to avoid all risk, good risk management can help reduce the chances of something going wrong and improve a company’s ability to adapt to unexpected events. Risk management involves identifying, assessing and planning for potential situations that could pose a threat to your business.

Steps in the risk management process

Strategic risk management involves understanding the types of risk inherent in your business and taking the actions necessary to reduce those risks. Follow these five steps of the risk management process to minimize your company’s vulnerability to unanticipated situations.

1. Identification of potential threats

Identifying possible risks involves brainstorming with team members as well as talking to any stakeholders in your business, such as board members, legal counsel and vendors. Track the risks you identify in a risk register to keep everything organized.

2. Risk analysis

All risks aren’t the same, so you need to analyze all of the potential issues you identified and determine which are the most likely and which would have the biggest impact on your organization.

3. Mitigation of risks

During this stage, you develop solutions and plans to reduce each risk you identified earlier. Concentrate on the most likely and biggest risks first, but design alternative plans for all of the situations where risk might be involved.

4. Implement risk reduction plans

Assign specific employees or members of your organization to address specific risks and let those individuals implement the details of your strategic risk management plan. You may also need to allocate resources to risk reduction.

5. Regular reporting and revising

Set up a regular schedule for monitoring how your risk management strategies are working, whether new risks are developing in your industry and how often the risks you identified actually take place. This can help you figure out which areas to concentrate on later when you revise your risk mitigation plans.

Risk management FAQs

What are the four types of risk?

The four types of business risk are:

1. Strategic risks

A strategic risk occurs when the business owner takes a risk hoping for a large return, such as making a decision to borrow money to grow your business. Strategic risks may be necessary for growth, but you can minimize the risk to increase the chances of success.

2. Operational risks

Operational risks arise from the employees and infrastructure involved in day-to-day operations. Inappropriate or illegal behavior by employees can affect your company, and cutting corners on equipment or processes may subject you to added risk later. Major events, such as natural disasters, also fall into this category.

3. Compliance risks

If your company is affected by federal or local government regulations, this can expose you to compliance risks if you fail to meet applicable legal guidelines. Understanding local rules and requirements can help you avoid this type of risk.

4. Reputational risks

Your business brand is built on the foundation of your reputation, and events that harm your reputation can affect your profits. Safeguarding your brand reputation helps keep consumers from viewing your business in a negative light.

What is an example of a risk?

An example of a business risk is the sudden introduction of new government regulations that make regular operation of your company more difficult or even impossible. New laws prohibiting certain products or processes might require you to rethink your entire operation if you depend on those products or processes.

What are the main benefits of risk management?

The main benefits of risk management include making your business more resilient in the face of changing circumstances and identifying potential issues before they become insurmountable problems.

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