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Using Risk Management When Planning Your Small Business

October 21, 2020 by BPM Team

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It’s no secret that 90% of startups fail. Among the main reasons for this high failure rate is the poor risk management practices implemented by leaders. For your startup to succeed, you need to know how to balance risks and profitability. While you might want to keep risks at bay, being too risk-averse can stunt your business’ growth.

On the flip side, being too profit-oriented and turning a blind eye to risks could come to bite you in the back. If you focus only on the expected profits, you might easily ignore risks that could bring your business down. With the right strategy, knowing how to approach your risk landscape becomes easy.

Here are a few steps on how to mitigate business risks and remain profitable:

Identify Risks

Risk management should always start with defining your risk landscape- making a list of the inherent business risks will be ideal. The risks can come in all forms, from compliance risks to operational risks. When defining your risk landscape, start by brainstorming the obvious risks that your business faces.

The less obvious risks will call for a more intense approach. For instance, you could consult industry experts for ideas on the kind of risk within your line of business. If you have been running your startup for a while, you can assess your history to identify past risks you went through.

Attending industry workshops and listening to podcasts and talk shows related to your industry could also help. The more comprehensive your list of risks is, the stronger your risk management will be.

Assess the Risks

Not all risks will expose your business to the same threats. While some will barely make any changes, others can be monumental in shifting how you run your business. For instance, a cybersecurity risk can be much greater than having a single employee fail to come to work for a single day.

There are two ways to assess and quantify risks; through the probability of them occurring and the impact they can have. Some risks might have a high probability of occurring but a low impact, and vice versa. Ideally, you should quantify both aspects of your risk, either by using a rating system or a percentage system.

Once you quantify the impact and probability of each risk, you can proceed to create a risk matrix, which will help rank the risks. This matrix will typically need you to multiply the probability of a risk occurring with its potential impact. High severity risks will typically have larger figures n the risk matrix than the low severity ones. Ranking risks using the risk matrix helps you prioritize them, which can be beneficial in optimizing your scarce resources.

Choose Ideal Risk Mitigation Measures

The ideal risk mitigation option for a specific risk will depend on your risk appetite. While your startup can easily absorb some risks, others might be too consequential to ignore. You can choose from four risk treatment options; risk mitigation, transfer, avoidance, or ignorance.

  • Risk Avoidance

If a risk could be quite damaging to your business, and you have no way to mitigate it, you should avoid it completely. This includes staying away from anything that could encourage its occurrence.

  • Risk Transfer

For risks that can best be handled by a third party, transfer it to them. For instance, there is an inherent risk that comes with having in-house servers. You can transfer this risk to cloud vendors by using their services.

  • Risk Mitigation

If you can easily handle a risk in-house, you should look for ways to mitigate it. For instance, cybersecurity risks can easily be mitigated by investing in the right tools and training employees accordingly. You need to assess the different risk mitigation options to pick one that will reduce the risk best.

  • Risk Ignorance

If a risk is too small to have an impact on your business, you don’t have to give it any attention. Simply ignoring the risk might be enough. For instance, you should ignore the entry of a new competitor into your market who poses no threat to your business. However, you should closely assess any risk before deciding to ignore it to avoid leaving your business exposed to the threat it poses.

Monitor the Risk Control Measure

Risk landscapes change all the time. While a risk might barely shift how you do business today, it can pose a monumental threat tomorrow. For instance, a new entrant into your market might come up with a product that might be more attractive to your customers. Risk management isn’t a one-time process; it needs to be done continuously.

You need to go back to assessing the risks your business faces and the control measures you have in place. You should only be satisfied if the control measure can help you handle the risks effectively. Take your time also assessing any new risks that might be emerging in your industry. Ideally, delegating risk monitoring roles to specific employees makes monitoring risks much easier.


What is Enterprise Risk Management (ERM)?


A great risk management process requires you to involve your employees throughout, from the onset of risk identification to risk monitoring. Make sure that you also educate employees on the different risk control measures to improve their effectiveness.

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Filed Under: Business Success, Featured Posts, Management, Start-up Tagged With: Featured Article, management tips, Risk Management, small business, startup

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