Running a successful business is one of life’s great balancing acts. You're in charge of handling every aspect of the company and ultimately responsible for the results your business churns out.
One of the most important roles a business owner has is managing money. Capital is the lifeblood of a business, failure to manage money efficiently and effectively will most likely see a company die a painful death.
On the flip side, getting capital management right and properly handling finances can extend a business’ runway and give owners a greater amount of time to work on their business.
That’s where risk management can show its hand.
Risk management is vital to any small business.
While the majority will assume it refers only to how a company's money is spent or invested, and the return on said investment, the truth is every element of a business carries risk.
There is risk involved in staff retention, your target market, the identity of your customers, and the management of money, to name just a few examples.
One of a business owner’s core responsibilities is to identify and mitigate risk on a daily basis. Therefore, it is crucial a small business owner knows how to apply a systematic approach to managing risk.
A common definition of risk is an uncertain event that if it occurs, can have a positive or negative effect on a project’s goals. Therefore, accepting the potential for a risk to have a positive or negative effect is an important concept for any business owner to grasp.
It is natural to fall into the trap of thinking risks have inherently negative effects. However, if an owner is open to the fact those risks can create positive opportunities, management can make their actions smarter, streamlined and more profitable.
Think of the adage –“Accept the inevitable and turn it to your advantage.” That is what business owners do when they mine project risks to create opportunities.
Below, the five risk management steps outlined by our MBA-qualified business coach, Louis Lines, combine to deliver a simple and effective risk management process.
Business owners and their team uncover, recognise and describe risks that might affect their plans or its outcomes. It’s necessary to record any perceived risks in a an excel document to keep track of the risks surrounding the business, as well as any progress made in dealing with them.
Once risks are identified you determine the likelihood and consequence of each risk. Owners develop an understanding of the nature of the risk and its potential to affect project goals and objectives.
Owners evaluate or rank the risk by determining the risk magnitude, which is the combination of likelihood and consequence.
They then make decisions about whether the risk is acceptable or whether it is serious enough to warrant treatment. These risk rankings are added to the excel document mentioned above.
This is also referred to as risk response. During this step, owners assess their highest ranked risks and set out a plan to treat or modify these risks to achieve acceptable risk levels.
The big question in this step is: how can owners minimise the probability of the negative risks as well as enhancing the opportunities?
The simple answer is to create risk mitigation strategies, preventive plans and contingency plans. Further to that, add the risk treatment measures for the highest ranking or most serious risks to your excel document.
At this step business owners should be using their excel document to monitor, track and review risks.
Risk is about uncertainty. If owners put a framework around that uncertainty, then they effectively de-risk their business. This can generate much confidence behind a business owner’s decisions and actions.
By identifying and managing a comprehensive list of project risks, unpleasant surprises and barriers can be reduced and golden opportunities discovered.
The risk management process also helps to resolve problems when they occur, because those problems have been envisaged, and plans to treat them have already been developed and agreed.
Owners avoid impulsive reactions and going into “fire-fighting” mode to rectify problems that could have been anticipated. This makes for happier staff and stakeholders, and a more motivated business overall.
The ultimate result is the minimisation of threats and the impact they can have on a business, while also maximising the likelihood of identifying opportunities a business can take advantage of.
If you want your company to get ahead of its competition, don’t be afraid to ask for help along the way.