How to identify and manage business risks

The most common types of business risks include financial, technological, operational, strategic, economic and market risks. [Photo: courtesy]

Venturing into business is risky. It takes time, money and determination. Even if the market is stable, you’ve done your research fully and taken proper precautions; your business can still be affected by different types of risks.

The most common types of business risks include financial, technological, operational, strategic, economic and market risks. Some of these risks have the potential to destroy your business, while others can lead to serious damage that takes a lot of resources to repair.

For instance, disruptive technologies might mean that your business has to invest in new systems and processes. If this isn’t something you had anticipated and adequately planned for, it can drastically affect your bottom line.

While risk can’t be fully avoided and prevented, smart business owners and managers can identify potential risks and prepare measures to minimise their impact. In fact, identifying risks is a key part of business planning.

With the right tools, procedures, knowledge and insight any business owner or manager can learn how to identify and manage business risks. Here are some tips to help you:

Write a business plan

Conducting proper research and writing a business plan is an important step in assessing, evaluating and planning on how to mitigate various risks associated with a business. Although many risks seem unpredictable, they become quite obvious if you take the time to write a business plan that includes a Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis.

When writing your business plan, consider the current and future state of the market. Make sure to articulate the risks your business is likely to face. This document isn’t just for you. Investors will also want to know the potential risks before giving you their money. Understanding the potential risks also helps them structure an appropriate funding package that works for all parties.

Are you worried that investors will be scared off if you open up about potential risks? Many newbie business owners have the misconception that talking about business risks with potential investors will only highlight weaknesses in their business. This is a valid concern that you can address by focusing on your risk management plan.

Create a risk management plan

As part or in addition to a business plan, you should also have a risk management plan for your business. In addition to listing the risks that could affect your business, a risk management plan also explores procedures to follow if the risks arise. In your risk management plan, you should estimate the impact that each risk could have on your business so as to come up with ways to minimise it.

Having a proper risk management plan is music to investors’ ears.  It shows them that you have done your research and have a realistic approach to mitigating risks that may arise. It goes a long way in assuaging their fears and enabling them to trust you with their money.

For example, your risk management plan could include obtaining relevant insurance policies to protect your business. If your business is located in an area where it could be looted by rioters, for instance, you can take a policy that specifically covers damage and loss from political unrest.

Bear in mind that just like a business plan, a risk management plan needs to be updated from time to time. In some dynamic industries where trends are always disrupting the market, you might need to tweak your risk management plan every year.

Train employees

Instinctively, the human mind has a fight or flight response to risks. The way we react to danger, uncertainty, or threat is firmly embedded into our psychology. While this response protects us, it can also be detrimental if it leads you to ignore potential risks in business or affects your productivity during stressful periods.

Train yourself and your employees on how to identify and manage risks. For example, ask them to write a detailed analysis of the situation and possible solutions. This trains them to think critically and come up with solutions instead of merely waiting for you or a manager to tell them what to do.

Encourage yourself and your employees to think of risks as an opportunity for learning and growth. No matter how bleak the situation may seem, try to maintain a positive mindset. Every great business that you admire has had to overcome several major risks and did so by being proactive and making informed decisions.

Seek expert help

As a business owner, there are many kinds of professionals that can help you identify and mitigate business risks.

For example, an insurance broker will be able to identify business risks that you might mitigate with various covers.

They can assess your claim history to identify improperly managed risks and advice accordingly. An accountant or financial advisor will help you identify and manage financial risks.

If your business is big enough, you can hire a risk management officer who is trained to react to risks and take favourable decisions under pressure. Risk management officers identify and assess threats to an organisation and put plans in place to mitigate losses.