At least 85% of all efforts of an organization are either unproductive or harmful to an organization. That means for every $1 million you are spending on activities in your company, $850,000 or more is going to waste or, worse, hurting your business.
Why do businesses lose that much money, regardless of how efficiently they try to take care of their efforts? One of the primary reasons is that most managers don’t know how to identify company risks and address them appropriately.
Risk management has always been a vital part of running a successful business, regardless of the economic environment. An unexpected event can swiftly destroy your business if you don’t have a solid risk management strategy. Such a strategy helps prevent or at least mitigate potential damages from that risk.
But exactly what is risk management? What business risks should you be watching out for? More importantly, what can you do to minimize risks in your business?
If you are asking yourself these questions, you have come to the right place. In this comprehensive guide, we tell you all you need to know about risk management.
What Is Risk Management?
Risk management refers to the process of identifying, assessing, and controlling potential threats to your company’s capital and earnings. Business risks can stem from different sources, including legal liabilities, financial uncertainties, and natural causes.
Common Types of Business Risks
The surest way to identify and control business risks is by first having a good understanding of the forms they come in and what implications they may have for your company. Here are the five top company risks to look out for.
Of all business risks, strategic risks have the biggest impact on your ability to reach your company goals. These risks can happen without warning.
A good example is where your company suddenly experiences a sharp decline in sales because customers’ preferences have shifted.
This type of risk involves new rules that are set by regulatory bodies or the government. Failure to implement these rules immediately could lead to trouble with the authorities.
Financial risk relates to the financial health of your business. The focus here is on cash flow and the potential for financial loss. All other types of business risks involve some degree of financial risk.
Operational risks relate to the company’s systems and processes. For instance, one of your production machines might break down before you meet the target output.
Also known as client business risk, reputational risk has to do with the potential for a damaged company reputation. A damaged reputation can lead to loss of revenue as clients start to shun your brand.
Reducing Company Risks
Now that you know the business risks you are most likely to face in business, how can you mitigate or avert them? Here are six expert suggestions for lowering business liability.
Prioritize Business Threats
Creating a risk management risk starts with prioritizing risks based on their likelihood to occur in your company. Start by listing risks that are very likely to happen, followed by threats that have some chance of occurring. Then identify threats that have a small chance of occurrence, and end with risks that have very little chance of happening.
Risks that fall into the top category should take priority over all other risks. Put a plan in place to prevent or at least reduce these risks. However, if you identify a risk that falls into a lower rung but has the potential to cause more financial damage, you should prioritize it.
Set aside time to assess company liabilities and all legal regulations and determine what insurance you need for your business. You may need to purchase life insurance, professional insurance, disability insurance, completed operations insurance, and so on.
When you purchase insurance, you are transferring your business risk to insurance companies for a small cost compared to the potential losses posed by uncovered risk.
Limit Your Liability
If you run a sole proprietorship, now is the time to change your business to a limited liability company (LLC) or a corporation. In this kind of structure, you can’t be held liable for the company’s debts and other liabilities.
Implement a Solid Quality Assurance Program
A stellar reputation is crucial for sustainability in business. Without great customer service, you will hardly be able to attract and maintain customers.
Ensure the quality of your products and services remain consistently high by conducting supplier prequalification. This process helps ensure that you are only working with suppliers who are right for the job and minimizes the likelihood of an incident.
Conduct regular analyses of your products and services to find areas you need to improve. Don’t forget to evaluate your testing methods periodically.
Limit High-Risk Clients
When you are still a startup, you want to work with customers who pay on time. Consider implementing a rule that customers with bad credit must pay upfront. The idea is to avoid any complications down the road.
Of course, you will need to implement a fool-proof procedure that helps you identify poor credit risks in advance.
Set up a Risk Management Team
A good way to stay on top of risk management in your company is to have a team dedicated to identifying and eliminating risks in your business. You can opt between an in-house team and outsourcing risk management services.
Having an in-house risk management team works great if you have an employee experienced in this area to head the department. You could also provide training to equip your team with skills in risk management.
An outside risk management team may be an excellent option as well. Such a team brings expertise to your risk management strategy, helping you map all out the business risks your company faces based on your operations. The team also sets up strategies you can implement the moment these risks occur.
Manage Business Risks Better This Year
Company risks are a reality you need to deal with, regardless of the type of business you do. To prevent these risks from hurting your business, you need to implement the right risk management strategies from the start.
Would you like to read more great content on business risk management? Visit the Finance and Business sections of the Everything Entrepreneur Blog to learn more about risk management and liability reduction for your venture.