This is where measures are taken to identify all possible events that might affect the normal running of the business. The events might be due to natural causes or man made errors .The business should be able to survive all this or recover from that.
Identifying business risk
There are many different types of business risk. Risks can be internal and external to your business. They can also directly or indirectly affect your business’s ability to operate. Risks can be hazard-based (e.g. chemical spills), uncertainty-based (e.g. natural disasters) or associated with opportunities (e.g. taking them up or ignoring them). The Australian standard defines risk as ‘the chance of something happening that will have an impact on objectives’.
Types of risk
The types of risk you face are specific to your business and its objectives. To effectively manage risk you should prepare for internal and external scenarios that may directly affect your business.
Direct risks to your business
Some common risk categories are:
- property and equipment, such as damage from natural disasters, burst water pipes, robbery and vandalism
- security, such as theft, fraud, loss of intellectual property, terrorism, extortion and online security and fraud
- economic and financial, such as global financial events, interest rate increases, cash flow shortages, customers not paying, rapid growth and rising costs
- staffing, such as industrial relations issues, human error, conflict management and difficulty filling vacancies
- suppliers, such as issues within their business or industry resulting in failure or interruptions to the supply chain of products or raw materials
- market, such as changes in consumer preference and increased competition
- utilities and services, such as failures or interruptions to the delivery of your power, water, transport and telecommunications.
You should use this list as a starting point for thinking broadly about the types of risks that could impact your business. You may discover that you need to consider other important areas of risk that are not listed here.
Indirect risks to your business
People often make the mistake of overlooking things that don’t directly impact their business and are therefore unprepared to deal with change. For example, while your business might not be directly affected by a natural disaster, you may still suffer if it affects your suppliers, customers or general location.
Consider how these scenarios could affect your business:
- If your suppliers are affected, you may run out of the products you sell, or the materials you need to make products.
- If your customers are personally affected their priorities may change and you could experience a reduced demand for your products or services.
- If your general location is affected, you and your customers may not be able to access your premises, or your utilities could be affected. For example, you could lose power, which could mean you:
- will not be able to operate your business
- may need to throw out any perishable goods and replace them, which can be costly.
Managing risk in your business
The process of identifying risks, assessing risks and developing strategies to manage risks is known as risk management. A risk management plan is an essential part of any business as it helps you to understand potential risks to your business and identify ways to minimise them or recover from their impacts.
The most common ways of controlling risk is taking insuring against the expected occurances and also putting preventive measures to stop or reduce the impact of a risk factor on the business.
Risk management involves identifying, analyzing, and taking steps to reduce or eliminate the exposures to loss faced by an organization or individual. The practice of risk management utilizes many tools and techniques, including insurance, to manage a wide variety of risks. Every business encounters risks, some of which are predictable and under management’s control, and others which are unpredictable and uncontrollable.
Risk management is particularly vital for small businesses, since some common types of losses—such as theft, fire, flood, legal liability, injury, or disability—can destroy in a few minutes what may have taken an entrepreneur years to build. Such losses and liabilities can affect day to day operations, reduce profits, and cause financial hardship severe enough to cripple or bankrupt a small business. But while many large companies employ a full time risk manager to identify risks and take the necessary steps to protect the firm against them, small companies rarely have that luxury. Instead, the responsibility for risk management is likely to fall on the small business owner.
The term risk management is a relatively recent (within the last 20 years) evolution of the term “insurance management.” The concept of risk management encompasses a much broader scope of activities and responsibilities than does insurance management. Risk management is now a widely accepted description of a discipline within most large organizations.
Basic risks such as fire, windstorm, employee injuries, and automobile accidents, as well as more sophisticated exposures such as product liability, environmental impairment, and employment practices, are the province of the risk management department in a typical corporation. Although risk management has usually pertained to property and casualty exposures to loss, it has recently been expanded to include financial risk management—such as interest rates, foreign exchange rates, and derivatives—as well as the unique threats to businesses engaged in E commerce. As the role of risk management has increased, some large companies have begun implementing large scale, organization wide programs known as enterprise risk management.