Strategy

Small business risk management strategy

No business life lesson can be complete without a discussion on risks and risk management. Risks are inherent in everything we do - from crossing the road to running a business. Some risks we can control while others we cannot. The mere mention of risk evokes different feelings depending on our disposition towards risk. Some of us are risk accepters while others are risk averse while still others are risk neutral.

Before we even begin our discussion on a risk management strategy, let’s be clear on what the term means. A number of people mistakenly associate risk with just bad things. “Oh! Let’s not invest there, it’s risky. We could lose our money.” Or “It’s too risky to take on this project.” But, risks can be good and bad. An effective risk management strategy ensures you recognize the good and the bad.

How you perceive risk

Risk is the probability that “good” OR “bad” things may happen that will impact your objectives. Risk management is the process of identifying potential negative outcomes and managing them while realizing potential opportunities. In layman terms risk management is:

• Identifying potential opportunities that further your objectives, and
• Identifying and minimizing the events that can negatively impact your objectives

You may be the type of individual who loves to take on risky ventures. At the other end, you tend to avoid risk taking at all. (Hmm … an entrepreneur and not a risk taker? Thats looks like a mismatch!) Whichever category you belong to, always look at the cost-benefit of each risk and then decide. And in order to do that, you need to understand the drivers of risk.

Risk drivers

The first step, of course, is to identify what kind of risks your business is exposed to. But where do you look for them? Both internal and external factors drive risk. You probably know some of them already.

• External drivers
  • Strategic risks: Competition, Customer needs & demands, Industry changes
  • Operational risks: Government regulations, Political environment, Culture, Vendors/suppliers, contracts
  • Financial risks: Interest rates, Foreign exchange, Credit
  • Hazard risks: Natural disasters
• Internal drivers
  • Strategic risks: R&D, Intellectual capital
  • Operational risks: HR, Systems & processes
  • Financial risks: Cash flow, liquidity
  • Hazard risk: Safety (Employee and Equipment), Security

The next step is to analyze and evaluate your risks.

Risk Analysis

Risk evaluation and analysis helps you determine the significance of each risk. It also enables you to decide whether to accept, mitigate or take action to prevent it. There are a number of tools you can employ to analyze risks:

• Market surveys
• R & D
• SWOT - Analysis of Strengths, Weakness, Opportunities, Threats
• PEST - Political, Economic, Social and Technology analysis
• Scenario Analysis
• Auditing and Inspection
• Industry benchmarking
• Business process analysis
• Risk map
• Brainstorming

Once the risks have been identified, I usually rank them based on their probability of occurrence and their impact. Check back with your business plan how the identified risks can impact your business. Use it to put in systems and controls in place to deal with the consequences of the identified risks - even the good ones.

Dealing with risk

Once you have identified, evaluated and analyzed your risks, it is time to deal with them. You can do one of gour things for each risk:

• Accept - There is nothing much you can do about certain risks. It is just beyond your control. Or the cost of eliminating a particular risk is too high. [Update: Sometimes the best option is to do nothing at all. For example, Dell did not consider all the factors when evaluating their risks. See this post “Dell Demands Takedown Of Our “22 Confessions Of A Former Dell Sales Manager“. Had they thought through this, they would have let things be and not stirred up the storm.]
• Transfer - Insurance is one of the well known methods to transfer risk.
• Reduce - You may be able to introduce systems and processes to reduce certain risks. Th negative impact of the risk is reduced.
• Eliminate it - Ideal, isn’t it?

Risk management is a continuous process that required discipline and effort from all parties involved. You need to monitor risks that have a negative impact and ensure changes, if any, need to be made to your strategy. An effective risk management process can significantly improve the success of your business.

• Cavalcade of Risk #28
• Carnival of Capitalists at Management Professor Notes II