Risk Management is the process of identifying, assessing and prioritizing risks and coordinating resources to minimize negative outcomes. It starts with identifying potential risks that face your business – risks could be internal or external. Things like the weather, your employees or stakeholders, could all be potential threats to the well being of your business.
Once you have identified all the risks you will need to assess the potential harm each threat could have on your business. By identifying the severity of impact and the probability or possibility of each risk you can create a risk management plan.
There are different types of risks and threats to the continuation and longevity of your business. Objective type risks are associated with things that can impact the outcome or objective your business is trying to achieve. What are the objectives of completing a project – what types of events can delay or stop the continuation and finalization of a project – lack of materials – work stoppages due to employee or weather issues, you must define all potential risks so you can manage or plan for them.
Scenario based threats can help you determine various scenarios that could negatively impact your business. There may be common threats to your type of business that similar businesses face that can help you assess and plan for. Charting all scenarios through, identification, assessment, probability, and potential outcomes can help you manage your risk.
Potential risks once identified and assessed fall into 4 categories: Avoidance – how can you avoid the potential risk, Reduction – how can you reduce or mitigate the risk, Sharing – how do you share the risk, and Retention – you accept the risk and budget or plan for it.
Risk Avoidance is the act of avoiding the activity that creates the risk. By avoiding the activity you also lose the potential gains that could be made with the risky activity.
Risk Reduction means reducing the severity or possibility of risk. Perhaps you have a novel idea that you know others could copy – creating barriers or making it harder to copy means others will take longer to get into your market or it will at least slow down the competition – it doesn’t take away the risk it just reduces it.
Risk Sharing involves the sharing of the risk or potential loss with others. Insurance is a great example in this scenario, the potential loss you could face could be covered by paying for insurance and have the insurance company bear the bigger impact should the threat materialize.
Risk Retention is accepting the loss or gain from when a risk occurs. Plan for it, by being ready and having a plan in place you are mitigating the potential for greater loss.
Whatever the potential risks you have in your business creating a risk management can help you mitigate and recover from the things that threaten the longevity and sustainability of your business.