Business risk management is essential for every business; being a key factor to its success. Market competition is at an all-time high. Therefore, it’s more crucial than ever to ensure a safe business plan that provides the highest possible profit. While all businesses face risk, some can predict and control it, while others can’t.
Boomerang’s article (as cited in Forbes, 2013) states that 8 out of 10 businesses are likely to fail. It’s no secret that risk-taking is a major step towards success. As the saying goes: “Willingness to take risks is the path to success.”
However, uncalculated risk can have damaging consequences.
Therefore, to take those risks, you must have an idea of what they are and how to manage them. Reading this article from start to finish will give you an understanding of business risk management and its different types.
What Is Business Risk Management?
Business risk management is the process of identifying and assessing risks along with developing strategies to manage them. Means of measuring and assessing risk depend on the given profession, industry, or business model.
Risk Management Plan
A risk management plan and a business impact analysis are fundamental elements of a business strategy. Identifying and understanding potential risks to your business will help provide recovery upon the occurrence of an incident.
Preparing a risk management plan is a common process. However, types of risk may differ according to the type of business. Risk management plans provide detailed methods for dealing with those risks.
Enterprise Risk Management
According to the Atlantic International University publication, the concept of “enterprise risk management” was created by risk management professionals. Its purpose was to implement prevention programs and risk awareness on a company-wide basis. Thereby, enterprise risk management seeks to control, identify and assess notably through insurance.
Enterprise risk management focuses on establishing a system of risk management throughout a company in order to handle the risks related to a rapidly changing business environment. Stating in Best’s Review, Tim Tongson wrote the following steps which provide an approach to implementing an enterprise risk management program:
- Include risk management into the values of the company.
- Support those values with actions.
- Run a risk analysis.
- Implement specific strategies to reduce risk.
- Develop monitoring systems to provide early warnings about potential risks.
- Perform periodic reviews of the program.
Types of Business Risk Management
We must study the different types of business risks and the ways of solving them in order to explain the concept and the importance of business risk management. In addition, we must look into business risk management models and analysis as well. In regards to Andrew Blackman’s main types of risk management in business, here’s an explanation of strategic, compliance, operational, financial, reputational risk, and political risk, and how they can affect your business.
Strategic risk is a source of loss that might arise from unsuccessful business planning. Hence, your company’s strategy becoming less effective and as a consequence, struggles to meet its goals.
A strategic risk could be a result of changes in customer demand, tough competition, or technological changes.
Xerox became famous for its development of laser printing which was a strategic risk to Xerox’s position. Indeed, it was able to change its business model and adapt to the new technology.
The company survived the strategic risk, and as a result, laser printing became a multi-billion-dollar business. Therefore, if it weren’t for the company’s clear understanding of business risk management, it wouldn’t have sold.
According to Workiva, strategic risk is managed by the following five major steps in business risk management:
1- Define business strategy and objectives: Companies use systems to carry out business plans. However, those systems sometimes fail to address and identify risk. Therefore, it’s extremely important for those systems to identify the business risks during the planning process.
2- Construct key performance indicators (KPIs) for result measurement: Your company’s model can vastly improve by utilizing those KPIs. Therefore, overall sales aren’t as valuable as KPIs sales per customer which promotes the need for answers.
3- Identify risks that can affect performance
4- Construct key risk indicators (KRIs) and tolerance levels for critical risks: KRIs are intended to anticipate potential roadblocks. Meanwhile, tolerance levels serve as triggers for action.
5- Monitoring and reporting: Companies have to monitor results and KRIs on a consistent basis in order to reduce risk to minimum.
Managing company compliance to meet law regulations is known as compliance risk management. Certain regulators are known to be aggressive by both lessening compliance investigation timelines and charging higher fines.
Furthermore, non-compliance can cause public embarrassment, bad reputation, and civil lawsuits.
Enterprise Features states four categories that explain management of compliance risk in business risk management:
1- Weak compliance risk management: Form a compliance team to identify compliance needs and requirements, and to assess the existing compliance program.
2- Compliance process and technology: Analyze objectives and compliance, and invest in new technology. Technological choices vary from compliant cloud storage for HIPAA, to unified GRC frameworks, to compliance point products such as financial reporting for SOX.
3- Reviewing millions of documents: Some compliance investigations require companies to analyze and review millions of documents within a few weeks. Consider automated compliance workflows which are platforms that save large amounts of money on the review process.
4- Avoiding violations: Interrupting possible violations due to non-compliance is a must. Digital communication monitoring analyzes suspicious patterns in digital messaging, such as employee texting and email patterns.
So far, risks stemming from external events have been discussed in business risk management. However, your own company’s also a source of risk.
Operational risk is an unexpected failure in your firm’s daily operations. It could either be a technical failure or a failure caused by people.
Operational risk is anything that interrupts your company’s operations. In some cases, operational risk has more than one cause.
For example, consider the risk of an employee writing the wrong check; that’s both a “human” failure and a “process” failure. In some cases, operational risk can also stem from natural events such as a power cut or a natural disaster.
Operational problems can also prevent your business from dealing with your customers, resulting in a loss of revenue and damage to your reputation.
Here’s a list provided by Tallyfy that explains the stages of managing operational risk in business risk management:
1- Identifying the Risk
In business risk management, understanding risk is as important as identifying it. Staff from different backgrounds are best to effectively identify all risks. Risks that are identified by a certain group of staff can be completely different but as crucial as other risks that were identified by other groups.
2- Assessing the Risk
Upon identifying your risks, start assessing them. This will have to carry out both quantitative and qualitative processes. Different factors, such as occurrence frequency, need to be addressed.
3- Measuring and Reducing
Reducing, measuring and possibly defusing your risks is the next step. As that is done, it should minimize your company’s risks and minimize their harm.
4- Monitoring and Reporting
Monitoring and reporting those risks is to ensure how effective the plan is. Most of all, it’s to ensure the effectiveness of your solutions regarding their ability to manage potential risks.
Financial risk refers to money inflow and outflow and the possibility of a sudden financial loss.
Business Insider states the following tips for managing financial risk in business risk management:
1- Carry Insurance: Insurance is meant to protect your business from potential losses that you can’t afford to replace.
2- Ensure enough emergency funds: Having appropriate emergency funds will be a lifesaver in unexpected situations. It’s central to have a side small fund for potential problems, but more important to have a separate savings account in case of a long-term crisis.
3- Invest with diversity: Although investing in different businesses won’t ensure a financial safety plan, it will reduce the risk of complete financial failure.
4- Have a financial plan B: The best counter for losing your job is to have an alternate job that offers financial security.
5- Know the right time to bail on an investment: If you’re smart, you can always control how much you ultimately lose from an investment.
6- Stay healthy: The cheapest health insurance is gained by staying physically fit. You can vastly minimize your risk of disease by simply exercising and having a healthy diet.
7- Read the fine print: Whenever you’re reviewing a contract, make sure you read the fine print; as it usually contains information that gives the other party an advantage in case of a conflict.
8- Stay in the game, don’t quit: It is wise to always challenge yourself and never stop learning. Also, you should always be willing to take on the difficult tasks that others ignore.
9- Have a minimal debt as much as possible: Your wealth is greatly reduced by having too much debt. Minimizing your debt will not only keep you in control of your life, but also will guarantee financial freedom as an opportunity.
Reputation is everything in business. A damaged reputation can cause a sudden loss of revenue and a turn off for customers. Furthermore, a bad reputation can cause staff leaving your business.
In addition, you may find it hard to hire good replacements, as potential applicants may have heard about your bad reputation. Suppliers may start to offer less. Advertisers or sponsors may decide to ditch you.
ClearRisk provides a number of steps for managing reputational risk in business risk management:
1. Include Reputation Risk as Part of Strategy and Planning
Investigate holes in your business and determine relevant reputation elements within your business. Visualize potential scenarios that could damage public perception. Determine indicators and warnings for each element so that you can know when to take action.
2. Control Processes
Standardization, technology, policies, and procedures reduce the likelihood and severity of events causing reputation damage.
3. Understand that All Actions Can Affect Public Perception
Top management must recognize the importance of reputation risk management, and middle managers must lead by example to promote positive messages to key stakeholders. Organisational training and procedures can ensure that all employees know how to behave and respond appropriately to any situation.
4. Understand Stakeholder Expectations
When you know what client expectations are, it’s much easier to meet them. Don’t try to set expectations too high by promising offers that you cannot follow-up on.
5. Focus on a Positive Image and Communication
It’s key to always send out positive messages to the public and to your customers. Over time, this will build up your reputation in the public mind, and by turn, reducing the impact of any damage in the future.
6. Create Response and Possible Plans
If the worst happens, your organisation must be prepared to respond quickly and appropriately.
How to Manage Political Risk in International Business?
“How to manage political risk in international business?” is a question often asked in business risk management by companies who make a serious mistake when they ignore or underestimate political risk. Political risk can pose significant problems to many companies.
Most companies neither measure nor manage political risk. However, effective management of political risk can enable companies to enter and navigate new markets and business environments, providing a potential for competitive advantage.
Take a look at Forbes’s three-step process for managing political risk in business risk management:
1- Identify risks: Risk managers identify the main political risks by geography. The key question at this stage is: “How can political rules affect our goals?” Study political risk types which range from capital controls, to increased taxation, to strikes.
In addition, study risks such as protests, wars, and terrorism to scan the horizon for potential risks. The next step is to develop an evidence-based set of risk scenarios, based on both well-defined and highly specific data.
2- Measure: Risk managers assess and quantify the potential impact of each scenario on the business. For example, a discounted cash flow analysis can be used to estimate the financial impact of specific events to help companies understand their tolerance levels.
3- Manage: The first element in managing political risks is to map potential risk management methods against the priority risks. Once your company sets a course of action, your team can assign duties and set a schedule for consultation, reporting, and review, as with other risk controls.
To sum it up, here’s what you have learned:
1- How to explain the concept and importance of business risk management.
2- Types of risk management in business.
3- Business risk management models and analysis.
4- How to manage political risk in international business.