How to identify and manage business risks

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Every entrepreneur knows or at least should know, that the very act of starting a business means taking a risk. Even when you position yourself on a relatively stable market, have all your papers in order, and take the right precautions, your business can be affected by physical, technological, human or location risks. However, in addition to these main risk types that are part and parcel of business management, there are also unexpected scenarios that could appear along the way and place you at a crossroads: should you take a risky decision with uncertain success odds or should you play it safe?

Although navigating the troubled business waters can be confusing at times, very few situations you run into are actually unknown or unforeseen. According to Daniel Wagner, a global speaker on international affairs and risk management, any business owner can learn to manage risk with the right set of tools, procedures, knowledge, and insight. Although navigating the troubled business waters can be confusing at times, very few situations you run into are actually unknown or unforeseen.

How to identify and manage business risks

Write a business plan and make a SWOT analysis

Although many risks may appear unpredictable, they are actually quite obvious if you take the time to conduct a thorough SWOT analysis and write a business plan.

Each industry and business type are associated with a certain degree of risk. Some ideas are relatively safe, such as food carts or consulting firms, whereas restaurants and retail businesses are more difficult to keep afloat. When you open your business, you should know right from the start how much risk your venture involves and in what forms those risks can appear.

Consider all your business activities, the current and future state of the market, and do a thorough analysis of all your departments. Ask all the “what if” questions and do consider the worst-case scenario, because hoping for the best is not a good strategy. By identifying all the threats that could affect your business and writing them in the business plan, you’ll know what to expect down the line and take security measures.

How to identify and manage business risks

The four ways you can manage risks

Once your business is facing a risky situation, these are four ways you can manage this risk, depending on the potential impact it can have on your business:

1. Control, mitigate, or reduce the risk

In business, risk mitigation means knowing that a certain risk could appear and having a plan B in place. This way, even if the worst scenario happens, you can twist the situation in your favor or at least minimize losses. Risk mitigation is an essential skill to have in all fields, but the financial sector is the one you can learn from the most. For example, Forex traders use social trading Forex networks to gain access to reliable trading information and market insights to bounce back from losses and create a contingency plan.

2. Avoid the risk

If you did a SWOT analysis and the threats significantly outweigh the opportunities, you can stop a business initiative completely. In general, risk avoidance is a recommended practice for small business owners who are more risk-averse and can be affected by short-term losses.

3. Transfer the risk

This risk management solution implies taking the risk, but passing it on to someone else, such as an insurance company. In general, this should be clearly laid out in advance, through a contract.

4. Accept the risk

Although this isn’t always a sustainable solution, accepting the risk and taking the full blow can sometimes work. For example, large businesses that have financial stability can afford a short-term loss if the impact isn’t that big.

How to identify and manage business risks

Always have a risk management plan in place and hire a chief risk officer

If you operate in a particularly risky business field, or you want to be extra safe that your business won’t be affected by unpleasant surprises, you should also make a risk management plan in addition to your regular business plan.

The risk management plan is an official document that lists all the possible risks that could affect your business, as well as all these other details:

  • Procedures to follow once the risk arises
  • Estimate the impact that each risk could have on your business (high-impact and low-impact)
  • Qualified staff who can steer the company through a risky situation
  • Ways to minimize and avoid predictable risks

Keep in mind that, just like the business plan, the risk management plan should be updated from time to time. In dynamic markets, such as technology and finance, where new trends appear on a regular basis, you might need to tweak this plan every year.

Although you can write this plan yourself, it’s better if you hire a Chief Risk Officer (CRO) for the role, because they are better trained to react to risks and take favorable decisions under pressure. When you haven’t been in business for long, you may not be aware how a certain category of risks can impact you, so the expertise of a Chief Risk Officer can prove to be invaluable. Of course, hiring this specialist is more financially feasible for trading companies and large enterprises than it is for small start-ups, which is why you should consider this last option:

Train your employees and yourself

The way we react to risk, uncertainty, and danger, is embedded in our psychology. Unfortunately, there are many cases of brilliant scientists, engineers, and innovators who developed game-changing products but their business went down because they cracked under pressure and didn’t know how to react to risks and didn’t train their employees to stay productive during stressful periods.

To make sure this doesn’t happen to you, follow these strategies to better cope with pressure and avoid emotional responses to risks:

  • Learn to examine risks from all sides. Sometimes, a risk is just a risk. Other times, it’s an opportunity in disguise.
  • Stay informed. Knowing what risks can affect your business and taking preventive measures will help you make rational decisions and avoid rash emotional reactions.
  • Understand the difference between the risks that are under your control and the ones that are not.
  • Avoid thinking of risks as a cause for stress and anxiety. Instead, think of risks as an opportunity for learning and growth.

Lastly, try to keep a positive mindset no matter how bleak the situation might seem. Every great business that exists today had to overcome several major risks, and they did this by being proactive and taking informed decisions.