Risk management has become more popular in recent years because the economy isn’t as strong as it had been prior to 2008. In this economic environment, an unexpected surprise can destroy your business in one fell swoop if you didn’t have the right risk management strategies in place to prevent – or at least mitigate – the damage for that risk.
External risks are out of your control. This includes, but is not limited to, interest rates, exchange rates, politics and weather. Internal risks are in your control and include information breaches, non-compliance, lack of insurance, growing too fast and much more. (For more, see: Importance of Risk Management for Entrepreneurs.)
The first step in creating a risk management plan should always be to prioritize risks/threats. You can do so by using a somewhat universal scale based on risks/threats that are:
Very Likely to Occur
Some Chance of Occurrence
Small Chance of Occurrence
Very Little Chance of Occurrence
Of course, a risk that falls into the top category should take priority over the others and a plan to prevent, or at least mitigate, these risks should be put into place. However, there is a catch. If a risk falls into a lower rung yet presents the potential for more financial damage, then it should take priority. (For more, see: The Real Risks of Entrepreneurship.)
Assess liabilities and legal regulations to determine what types of insurance will be required for your business. This might include:
Buying insurance allows you to transfer your risk to insurance companies. (For more, see: Insurance Coverage: A Business Necessity.)
Implement a Quality Assurance Program
A good reputation is imperative if you want a sustainable business. Customer service is a key to success whether you’re offering products or services. Be sure to test those products and services in order to assure the highest quality. By testing and analyzing what you’re offering, you will have an opportunity to make necessary adjustments. Also strongly consider taking it a step further, which is to evaluate your testing and analyzing methods. (For more, see: Asset Protection for the Business Owner.)
Limit High-Risk Customers
If you’re just getting started, immediately implement a rule that customers with poor credit must pay ahead of time, which will avoid complications down the road. In order to do this, you must identify poor credit risks ahead of time. (For more, see: Identifying and Managing Business Risks.)
This has everything to do with employee training. If you’re selling products and/or services and you set lofty goals for employees, they might be tempted to take unnecessary risks, which can lead to a bad reputation for your company. Instead, train your employees to focus on quality, not quantity. By doing so, you will avoid the risk of declining sales due to high-pressure sales tactics that customers don’t appreciate.
On a related note, while innovation is a key to success, you don’t want to innovate too fast. If your company is constantly relying on the next innovation for growth, then a hiccup is inevitable because not all new products and services will be successes. (For more, see: 10 Characteristics of Successful Entrepreneurs.)
Appoint a Risk Management Team
If you want to save capital by not having to hire an outside firm, and there is time available, you can appoint current employees to head a risk management team. However, this would only be wise if someone within the team has experience in this area and can act as a leader. Otherwise, paying for an outside risk management team will be a worthwhile investment. They will be able to map out all the risks/threats to your company based on your type of business, and set up strategies to implement immediately if any of those risks become a reality. This should lead to the prevention, or mitigation, of those risks/threats.
The Bottom Line
Risk management is a form of insurance in itself, and in today’s economic environment, it’s an imperative step for sustainable success. The seven steps above should get you started. But remember that they are just starting points. (For more, see: Disability Insurance for Business Owners.)