Introduction
A successful business, in a nutshell, is one that maximizes their opportunities by limiting or mitigating their Business Risks. This is a simple concept; however, some businesses end up failing after a few years of operation despite their brilliant business model and ideas.
Opportunities and Business Risks need to be assessed separately before combining them together. Therefore, this article will focus purely on understanding and managing Business Risk.
What is Business Risk?
It is critical to understand what risk is. It is defined as exposure to an event or situation that will cause an adverse impact. Therefore, Business Risk is exposure to event or a situation that could adversely impact your business.
Business Risks can be divided in several categories depending on the level of analysis however a good starting point to assessing the risks in your company is to split them into internal and external risks.
Internal Risks:
These risks stem from inside the business. These are usually controllable risks however it can be difficult to assess when they take place or to analyze the extent of their impact. Examples of these can be either low motivation of staff, internal conflicts between team members or even lack of communication/coordination. These risks can usually go unnoticed and by the time management realizes, it can be too late.
External Risks:
These risks are derived from factors that are external to the business. For instance, changes in consumer trends, inflation, political situations etc. External risks are usually not in the control of a business however it may be possible to measure their impact on the business through historical experience and trends and take appropriate actions.
For example:
Business: Event organizer
Risk: Adverse weather (e.g., rain) may result in the even being cancelled.
Measurement of Risk: Loss of expected revenue and additional penalties that may be required to be paid.
Action: Appropriate insurance policies and agreement of sharing of penalties in all affected parties.
Why is it important to understand Business Risks, to act and useful tips:
If entrepreneurs do not pre-empt controllable factors of risks, then they leave themselves exposed to losses. It is therefore critical to understand what your Business Risks are and where they stem from to enable you to act appropriately on them.
The first step for managing risk in a business is compiling a Risk Register. This is a risk management tool that documents all the risks, their likelihood, their impact, and the mitigating actions can be taken. This allows contingency plans to be set in as soon as the risk takes place and management to be proactive rather than reactive in an adverse situation.
The Risk Register should be created in collaboration with all key management personnel and reviewed regularly to ensure it is up to date. It is also useful to have a dedicated owner of each risk. This is usually the person who is responsible for the respective risk area, to ensure there is ownership and accountability.
Lastly, business owners should not isolate themselves from what is happening in their market, whether this is in their country of operation or globally. Strong commercial and business awareness will result in entrepreneurs to be up to date of potential risks (and also opportunities). This can be acquired through keeping up to date with current affairs, building a strong network and reading relevant literature.
Conclusion:
Understanding problems and challenges thoroughly enables an individual to be better equipped to address them. We hope this article enables you to better understand Business Risks and how to prepare yourself to address them.
Every business is unique and has its own nuances, therefore, we encourage businesses to do their own assessment of risks. Once a Risk Register is complete, it is useful to compare it with similar companies in your industry to assess if any applicable risks have been missed.
Hiring an expert to support you to complete a Risk Register is also a good starting point. This enables management to spend energy and resources only on critical areas that are identified by the experts and experts will benchmark the Register to those in the industry.
If you need help in assessing business risk or how to address your challenges, feel free to reach out to Balance Consulting at [email protected] where our group of experts can support and guide you.