Risk management strategies for business – definition, types, importance

A risk management strategy is a structured method to address risks to your business. It is a process business owners use to identify risks that could affect their operations. There are various types of risk management strategies that can be implemented by businesses of any size and in any industry. Generally speaking, risk management works best when it is thought of as an ongoing process, rather than a series of steps.

Developing a risk management strategy, which often includes several types business insurance (including Public Liability insurance) can help business owners make better decisions and operate more securely and confidently. Risk management is considered essential for many businesses, regardless of their size or industry.

New and ongoing risks should be continually assessed, managed, and monitored. This approach provides scope for the process to be reviewed and updated whenever new developments occur or when taking additional steps to protect your business, its people and its assets.

Most businesses face both project risks and operational risks, which means that risk management strategies and processes can be vital for identifying the strengths, weaknesses, opportunities, and threats (SWOT) to your business.

What is risk management and why is it important?

Effectively managing the risks to your business has many advantages, regardless of the industry you are in. More and more business owners are focusing on identifying and mitigating risks and monitoring them in an environment that is becoming increasingly volatile.

As a business owner it is important to manage your risk to uphold business confidence and to protect your profitability. Further, understanding business risk mitigation and the small business threats you may encounter can help your business succeed in the following three key areas:

1. Achieving your business goals

Risk management can help you determine what risks you may need to address and what strategies you will use to mitigate risks that may prevent you from achieving your business goals.

2. Improving customer retention

When you manage risk around your customer relationships, you may increase your chances of improving customer satisfaction and increasing customer retention.

3. Boost employee confidence

Implementing risk management strategies can help employees feel more confident in their roles, their workplace, in your business, and ultimately in you as the business owner.

Types of risks your business may face

How your business responds to risk will depend on the type of risk, or risks, it is facing. Risks can be categorised in the following four groups:

1. Hazard-based risks

Hazard-based risks come from materials or actions that can potentially be harmful. Hazard-based risks to your business may include:

• bacteria, fungi, pests or viruses;
• bullying and harassment;
• discrimination;
• working at heights;
• carcinogenic, flammable, poisonous or toxic chemicals;
• faulty equipment;
• high noise levels;
• improper storage;
• poor workplace design; and
• incorrect equipment use.

2. Opportunity-based risks

Opportunity-based risks occur from choosing one opportunity over another, such as entering a new market or investing in a new product. When you invest your time and resources into an opportunity, you may risk missing out on a better opportunity, or not get the results you were expecting.

3. Uncertainty-based risks

These risks by their very nature are unpredictable. They may include things like changes in consumer demand, fluctuations in the stock market, or natural disasters. Other examples of uncertainty-based risks include:

• financial loss when a business files for bankruptcy while owing your business money;
• legal action;
• loss of customers or suppliers; and
• a decline in market share due to the arrival of new competitors or products.

4. Operational-based risks

Operational risks can occur in the day-to-day running of any business, including yours. They may stem from flawed systems and processes, or from disruptions that can lead to financial losses for your business. Other examples of operational-based risks include employee error, equipment failure, and fraud or other workplace-related incidents.

Choose your risk control methods

There are many risk management techniques and risk treatment plans available to your business, and each has its own advantages and applications. So, if you are thinking about formalising how you manage risk in your business, here are 10 risk management strategies you may consider.

1. Business experiments

This ‘what-if?’ strategy can be used to test different scenarios and assess the impact of potential threats to your business. Many functional groups in a business, from IT to marketing, are experienced in running business experiments. Financial teams run experiments as well to assess financial metrics or to gauge potential return on investment.

2. Validation of theory

In the validation of theory approach, questionnaires and group surveys are used to gather feedback from users based on their individual experience. If choosing the validation of theory approach, it is important to obtain direct, timely and relevant feedback directly from the end user in order to help manage potential challenges, design flaws and better manage the risk.

3. Minimum viable product development

It may not always be best practice to develop complex systems with nice-to-have functions. In order to manage risk with risk management techniques, it can be important to have systems and processes with core features that are relevant and useful to the majority of your customers.

This is known as a ‘minimum viable product’ (MVP). An MVP helps keep projects on track, reduces the financial burden on your business, and enables businesses to go to market faster.

4. Isolating identified risks

Information technology teams have become accustomed to collaborating with external or internal help to identify security gaps or flawed procedures that could leave a business open to vulnerabilities. In doing so, they become proactive and identify security risks (whether external or internal risks) before an event occurs, rather than waiting until a malicious or costly breach occurs.

5. Building in buffers

Business owners who know all about risk management importance know that a buffer is necessary, whether it’s for a technology project or for a business audit. Buffers help reduce risk by ensuring that initiatives are kept within their intended scope. Buffers can be financial, time or resource-based, depending on the project. Here, the goal is to ensure that there aren’t any surprises that could pose unforeseen risks.

6. Data analysis

The collection and analysis of data are essential elements for assessing and managing different risks. Qualitative risk analysis, for example, can be used to identify potential risks in a project. A qualitative risk assessment helps identify and prioritise risks and develop strategies for addressing, monitoring, and reevaluating them.

7. Risk-reward analysis

Analysing risks and rewards before investing time, money, or resources can be part of a sound risk treatment plan. The risks and rewards associated with investing money to pursue new business opportunities are not the only thing that matters. It is also important to understand the costs of missed opportunities.

8. Lessons learned

Every initiative or project your company undertakes, or fails to complete, will have lessons that you can learn. Lessons learned can be a powerful tool to reduce risk in future projects and undertakings. But they are only valuable if the team takes the time to document, discuss, and create an improvement plans based on their findings.

9. Contingency planning

It is rare that things go according to plan. Having a good plan, however, is not enough. Plan to have several options or plans based on different scenarios. Contingency planning is about anticipating the worst and preparing alternate solutions to mitigate risks.

10. Leveraging best practices

Best practices are listed under risk management for good reason – because they are tried and tested methods for business success. They may vary from one industry to another and from project to project, but they ensure that businesses do not have to reinvent the wheel. This reduces the risk to a business.

Four essential steps for your risk management strategy

Whichever risk management strategy you choose, generally speaking you will likely use the following four steps when implementing your risk management strategy.

Step 1: Identifying risks

Identifying external and internal risks can be achieved by identifying vulnerabilities passively, or implementing tools and processes that help alert you to potential risks to your business. To reduce your risk, consider taking a proactive approach to risk management in your business.

Step 2: Assessing risks

After identifying potential risks, assess each one to determine its likelihood of becoming an issue for your business, and the potential severity and impact it may cause for your business. This can help business owners prioritise each potential risk. Your audit team may also conduct systematic risk assessments, document them, and review the results at least once a year. The frequency of risk in your assessments will vary depending on the size and complexity of your business.

Step 3: Risks and response

The next step in the risk management process is developing and implementing treatments and controls. These methods can help your business to address each risk appropriately and deal with it effectively and in a timely manner.

Step 4: Monitor your risks

Small business threats can creep up on business owners, which means risk management works best when part of be an ongoing process that involves tracking the execution of risk management and identifying and managing new risks.

Carefully monitoring the risks to your business enables you to act quickly when the severity, likelihood or potential impact of a particular risk exceeds acceptable limits.

How BizCover can help keep you in business

A key part of risk management in business is reducing your risk, and this is where BizCover can help lighten the load on business owners by making business insurance fast and easy.

Whether you’ve chosen to use the four risk response method (mitigation, transfer, avoidance, acceptance) to handle your IT risk management, or another risk management strategy, BizCover can support your approach to risk management via business insurance simplified.

BizCover makes business insurance fast and easy. Want to find out how we do it? Compare competitive business insurance quotes online from leading Australian insurers and get your business insurance sorted in 10 minutes – without the drama!