Unlock Business Success with Smart Risk Management
Navigating the Minefield: A Comprehensive Guide to Risk Management for Small Business Owners
Video time: 11 minutes
Survey time: 1 minute
Reading time: 7 min
Worksheet time: 1 - 2 hours
Commentary directly from the video (regular type)
My commentary (italics)
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Understanding Risk in Business
The video begins by highlighting the omnipresence of risk in every business, regardless of its size. From insurance claims, fires, slip-and-fall incidents to vehicle accidents and defective products, understanding different forms of risk is crucial for making informed investment decisions. Managing risk is all about protecting your downside.
You’ve committed a lot of money, time, and energy to your business - you don’t want to lose it all to something that could have been anticipated and protected against.
“Business risk is the probability and impact of an event with the potential to control and influence the achievement of an organization's goals.”
The Essence of Risk Management
Risk management in the financial world is described as the process of identifying, analyzing, and either accepting or mitigating uncertainties related to investment. This process is essential for investors and fund managers to quantify potential losses and take appropriate actions aligned with the investment targets and risk tolerance of the fund.
I’ve drawn parallels between running a business and investing before. They are alike in many ways. Risk management for a small business also encompasses identifying and analyzing uncertainties. Then, once they are identified and analyzed - deciding if you can live with them, or... if you want to limit the amount of damage they can do.
Every small business owner has a different tolerance for risk too. Risk management isn’t strictly a numbers game. Your personality and comfort also play a part.
“Remember, risk management is not about eliminating all risks but rather minimizing their potential impact.”
Four-Step Risk Management Process
The video outlines a five-step process to effectively manage risk:
Identify the Risk: The first step is identifying various types of risks—legal, environmental, market, regulatory, etc.—that a business might encounter in its operating environment. Employing a risk management solution makes these risks transparent to all stakeholders.
There are a LOT of other types of risk you might consider (from the accompanying spreadsheet). For instance: financial, operational, cybersecurity, reputational, strategic, compliance, HR, health and safety, geopolitical, competitive, technological, supply chain, credit, and liquidity (😟)
Analyze the Risk: After identification, the next step is to analyze how likely these risks are to occur and their potential impact. Factors like possible financial loss, time lost, and severity of the impact are considered during this stage.
Prioritize the Risk: Post-analysis, each risk is ranked based on its likelihood and potential impact on the project. This gives a comprehensive view of the project and helps in identifying solutions without interrupting the project.
Taking the likelihood × the impact (both on a scale of 1 - 10) will give you a risk score for each risk. This, in turn, will help you with prioritization and determining the frequency of review.
Treat the Risk: Effective risk treatment starts with focusing on the highest priority risks. The aim is to either solve or reduce these risks, ensuring efficient use of team resources without disrupting ongoing projects.
Each type of risk could warrant its own post on treatment. There isn’t really any one-size-fits-all solution for any type of risk.
Monitor the Risk: Continuous monitoring and transparent communication are key in managing risks for small businesses. Once specific risks are identified, adopting the right strategies is crucial to mitigate these risks effectively and ensure business stability.
These tasks could be delegated to a Risk Manager or Compliance Officer in your organization - if you have one. If not, consider hiring a Risk Management Consultant, which will cost you $100 to $300 per hour.
Xtensio, a website for the sharing of business documents, has a SWOT analysis template that can help you understand Strengths, Weaknesses, Opportunities, and Threats - which can affect risk levels.
Atlassian, a project management software company, has this risk register template that can help you identify, prioritize, and track risks that your company faces.
FEMA, the U.S. government agency, has a business continuity plan template that can help you focus on how a business will continue its critical functions during or after an emergency event.
The California Firefighter Joint Apprenticeship Committee has a crisis communication plan template you can use to outline how communication should be handled in the case of a crisis.