Risk management in business is more than a necessary evil. According to Statista, the leading risks to businesses globally from 2018 through 2021 are supply chain disruption, health and workforce issues, and cybersecurity.
Cyber threats, in particular, are gaining traction, thanks to digital transformation expedited by the shift to remote working and the pandemic in general. Cost of Cybercrime study done by Accenture found that 43% of cyberattacks are aimed at small businesses, yet only 14% are prepared to defend themselves.
Below, we’ve broken down the different types of risks, the risk management process, and how best you can mitigate risks in your small business.
What Constitutes a Risk in Business
Anything that can affect your business’s ability to make a profit is considered a risk. The severity of risks varies, and so do their consequences. Most risks lead to either monetary losses or some reputational damage, or both. But some are so severe that they may take you out of business entirely.
There are two major categories of risks – pure and speculative risks. Pure risks are those that the business has less control over. For example, natural hazards like fires, floods, the death of an employee, etc. Speculative risks are those that the business can mitigate to some extent— for instance, the decision to launch a new product or open an office in a new location.
In most cases, business leaders, risk managers, and the board will evaluate and minimize speculative risks. However, talks and plans on pure risks often involve an insurance company.
Understanding the Risk Management Process
Running a business is already a lot of work. And the fact that forces behind the scene could quickly bring your business down makes this even more complicated. Small businesses, in particular, do not have the luxury to make certain mistakes. That is because, unlike larger businesses, they don’t have the financial backing to pay for their sins.
Having a solid risk management strategy in place isn’t only a critical success indicator but also a survival tactic. At the core of business risk management is identifying the risks. What follows next is to assess the chances of those risks happening, then developing a risk-mitigation plan to act as your defense. Choosing an insurance plan is another critical decision to make. Here’s a quick breakdown:
Group risks as either pure or speculative. Further identify those risks that are primarily out of your control, such as property loss due to fire hazards, hurricanes, theft, etc. Others are those risks that you can try to minimize their impact. For instance, data breach or liability claims due to employment compliance issues or employee work-related injuries.
Once you have identified the various types of risk, narrow down to their probability of happening. Analyze the potential damages and quantify the financial losses due to each risk. Where possible, you can formulate these risks into a hierarchy, from the most catastrophic to the least.
Risk Mitigation and Planning
At this point, it’s pretty clear which risks need more emphasis than others and which have higher chances of occurring than others. At times, the probability of a potential risk happening is low, but their implications are so significant that they would outweigh all the other risks combined. When this is the case, you should invest in a suitable insurance plan. An example is a fire hazard or work-related injury or death. For small businesses, insurance plans range from general liability, commercial property, errors & omissions, professional liability, etc.
Besides buying an insurance plan, you also want to update your risk management strategy from time to time. Revisiting your insurance plans every six months is an excellent place to start. This way, you may find cheaper options in the market that offers the same or even better coverage.
Managing Risk and Ensuring Business Continuity
If any of the risks above affect your small business, the measures you have in place should be sufficient enough to withstand the weight of the risk itself. If that is the case, then you’ll have succeeded with your risk management goals. But that’s not the end goal. You also want to get your business back online and running as soon as possible.
For instance, if you have survived a cyber-attack, you want to weigh your chances of going back online without attracting more attacks or further damage. This is where business continuity planning comes in. If you have a robust plan on how you can revive your business after incurring any risk, you’ll be in a better position to retain your customers and safeguard your reputation.
Get Started with Integrated Risk Management Solutions
To successfully identify, assess, and mitigate risks as well as ensure business continuity, you’ll need to rethink your risk management strategies. More often, businesses rely on their in-house risk personnel to develop all the solutions for all the possible problems. In today’s fast-paced world, this plan doesn’t work.
Instead, you need a comprehensive risk management solution that integrates every possible risk and ensures continuous monitoring. Such a platform would provide greater visibility into your IT and business risks, allowing you to stay ahead of potential problems.