Risk is a double-edged sword in business.
When you began your business, you probably weighed the risks that came with stepping into entrepreneurship. You also potentially recognized that with the risk of uncertainty also came an opportunity for creativity—and the possibility of launching something you could be proud of.
As SUCCESS’® 2024 Woman of Influence and the first woman pilot of an F-14 Fighter Jet, Carey Lohrenz understands uncertainty and risk like few others—yet she doesn’t see them as purely negative. “Uncertainty is not just a risk, but it’s an opportunity and sometimes we need to take a step back, take a breath,” she tells Amy Somerville in an Unscripted podcast episode.
Though all businesses come with inherent risk and uncertainty, sometimes it’s not the wisest idea to continually take risks to succeed. Real success also comes from mitigating or lessening the potential consequences of risks that could come to fruition. As Lohrenz puts it, developing a comprehensive risk management strategy is taking a step back.
Below, we explain risk management and why it is a cornerstone of solid entrepreneurial practice to prevent financial loss, legal operations and operational disruptions. Let’s break it down.
What Is Risk Management In Business?
Roughly, risk management is the act of finding, understanding, analyzing and reducing the amount and/or types of risks in your business.
It also means developing plans and strategies for facing and managing risks that inevitably crop up over a business’s lifetime—and how serious their consequences are. These risks could come from financial, legal, technological or brand sectors, each with its own degree of damage. Risks also come from human error.
For example, say you work in the legal industry as a paralegal. A potential risk for corporate clients is not having accurate business records. This could lead to minor hiccups, such as fixing their corporate information at the last minute. It could also lead to significant issues, such as a client not being able to get financing from a bank for a transaction due to poorly maintained records. Unmanaged corporate records for clients would be a risk a law firm faces.
Part of managing that risk is putting guardrails in place to prevent the mismanagement of corporate records. For example, you could purchase technology to track documents efficiently. You can also train staff to clearly understand how to document corporate minutes to reduce errors and keep records tidy. All of these actions would help manage a key risk for the firm.
Types of Risk
While the example above might be easy to understand, risk management looks different depending on the type of sector you work in, the risks you face daily, the seriousness of those risks and other factors. Here are the common types of risks that many businesses face—sometimes daily:
- Financial Risk: Financial risk is a business’s ability to handle financial issues that are either internal (e.g., cash flow management, being able to pay employees) or external (e.g., changing interest rates, unforeseen market changes). If a business faces large financial risk, it might be unable to pay bills or secure credit to continue operating.
- Operational Risk: Operational risk arises from internal and external factors that may cause a business to experience major bottlenecks in operations. For example, internal operational risks may be human errors, and external operational risks may be natural disasters.
- Strategic Risk: Strategic risks come from ineffective or inactive business decisions. For example, not having a succession plan in place for a small business with an older sole owner could be a major strategic risk. If the owner retires without someone to take the reins, the business model could be in jeopardy.
- Compliance and Regulatory Risk: Compliance and regulatory risk result from how well a business follows the laws and rules surrounding its profession. Failure to keep up with regulatory and legal developments could have financial or even reputational consequences.
- Reputational Risk: Reputational risk is the potential for a business to suffer damage to its reputation or public view. A common reason for reputational risk is poor customer service, which usually leads to negative reviews posted online.
Planning and Risk Management: Integrating Risk into Business Goals
Risk management planning and strategizing should not occur in a vacuum. You should implement it—and bake it into—your overall business goals. By not doing that, you could mis-evaluate decisions that look good for your business goals but don’t consider risks, and vice versa.
Jennifer Johnson, founder of True Fashionistas, a lifestyle resale retail store in Florida, has seen firsthand what happens if business goals and risk management aren’t aligned. At one point in her business’ lifecycle, Johnson was approached by a national mall seeking to have her store in its location. It’s “wooing” worked, Johnson tells SUCCESS, “As a small business owner, all I saw was stars. [I thought] ‘oh wow a national mall wants us (they usually never even consider resale stores.)’”
Because the move aligned with her goals, Johnson moved into the location immediately. But, nine months later they pulled it. Her business wasn’t ready for the expansion due to improper risk management at the time. “It didn’t work. If we would have had risk management tied to our strategic growth plan I am quite certain we would not have wasted so much time and money,” she says.
By building your business goals and risk management strategies side by side, you can mitigate risk while still propelling your business forward.
Key Risk Management Strategies
Mitigating risk in an organization can involve many different approaches. Here are several key risk management strategies.
Identification and Assessment
Identifying and assessing risk is critical to any successful risk management strategy. Identifying a risk means pointing out or becoming cognizant of a potential issue in your business. This could be a training bottleneck in staff, for example. Assessing that risk requires you to measure its impact. If that risk were realized, how much damage would it cause? Once a handful of risks are identified and analyzed, they should be ranked from most to least important.
Risk Avoidance
Rather than take an opportunity and the accompanying risk, a business may opt not to engage in risk-laden activities. By not participating, risk is effectively neutralized, but so is any potential benefit.
Risk Reduction or Mitigation
Instead of avoiding risk altogether, risk reduction or mitigation strategies aim to take on risk while simultaneously trying to reduce its effects. For instance, your business may purchase a competitor—a transaction with a large potential for something to go wrong. So, as part of that transaction, you review the target company’s financials and staff makeup closely to lower the chances your purchase will hurt your company in the long run.
Risk Transferring
Transferring risk is when a business uses a third party to absorb risks it may take on. A common scenario is businesses purchasing insurance to protect themselves from liability.
Risk Sharing
Similar to risk transferring, sharing risk means spreading it around multiple parties—but not displacing it to one person or location. A prime example of this is starting a limited liability corporation rather than working as a sole proprietor. This allows you to share the risk with your corporation instead of personally carrying all of it. However, you will still have risks operating as an LLC.
Benefits of Implementing Risk Management Strategies
Using even one of the above risk management strategies can completely shift your business’ trajectory for the better. Here are some common benefits when you tackle risk in your organization.
- Reduce financial losses
- Avoid reputational or brand damage
- Increase executive decision-making and confidence
- Improve employee productivity
- Demonstrate leadership in your sector or community
- Improve adherence to laws and regulations
Effective Risk Management Tips
Discussing risk management on a corporate level can feel daunting quickly. You become acutely aware of all the risk-laden decisions you face every day. How do you—or where do you—start? Review these tips to get some ideas going.
- Connect with peers and other businesses to see multiple risk strategies in action
- Train and invest in employee’s risk management approaches
- Be willing to embrace failure
- Record as much data on your organization as you can—then act on it
- Continually monitor and adjust your risk strategy as your business evolves
- Learn to accept risk and uncertainty as a given in business
- Learn to be emotionally and mentally resilient through tough times
- Be willing to embrace technology to help with strategic planning
- Don’t be afraid to step into risky situations—so long as the benefits are worth it
Businesses that Understand Risk Management are Miles Ahead of Competitors—Don’t Wait
Risk is a staple of business. You cannot succeed without taking some measure of risk, but that doesn’t mean you are priming yourself for failure. By using risk management strategies such as risk avoidance or transference, your business can seize opportunities with the potential for massive rewards without absorbing all the consequences. Want to stay ahead of your competitors? Start managing risk.
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