When anyone starts a business, they’re subject to certain kinds of risk.
The business owner needs to identify the various risks faced by the business.
For example, operating risk can occur due to economic conditions, the kind of industry the business operates in or the risk of losing key employees or major customers.
Financial risk relates to how the business is financed.
So how do we as business owners manage all these risks?
The first step would be to identify them. You can categorize your operating risks as being external threats to your business or internal weaknesses of your business.
You can then sub-categorize these items into whether or not they would affect your input, processes or output.
Risk assessment needs to be critical in order to understand what the weak points of your company are.
Business owners and executives are usually optimistic when it comes to risk and exposure to that risk, so it is important to have an objective point of view when accessing risks facing your business.
Once you have identified all the known risks there is still the risk of not identifying risks that you don’t know about, so there is always a risk in business.
However, knowledge is power.
Examples of internal weaknesses include capacity limitations or a limited number of trained employees, inadequate data recovery systems, reliance on a handful of products or services to produce the revenues, pending expiration of patents.
Examples of external threats are reliance on one supplier for a key product, lack of capital to support growth, rapid changes in technology, changes to industry regulations, increased competition, economic conditions and foreign exchange.
Once you have identified your risks you need to rank them by severity and likelihood that they would occur.
Then you would focus on reducing your risk on those items that would have severe consequences and are likely to occur.
Risk is change so it never stops, just changes, so business risk needs to be evaluated on a regular basis so that it can be managed effectively.
Management of risks involves a trade off between the potential reduction of risk and the cost of implementing measures to reduce your risk while still remaining competitive.
Businesses can control their internal risks but need to adapt to manage the external risks.
In order to remain competitive a business needs to be innovative and adapt to external changes in an efficient and effective manner.
Becoming adaptive is easier said than done. It means keeping your eye on the market for trends and developments so that you know where things are headed.
Our health industry is an area where the change in market (aging demographics) was not considered which explains why we are facing certain issues at the hospitals today.
The idea is to become ‘proactive’ rather than ‘reactive’ to risk.