Top Ways to Manage Business Risks

Fact checked by Ryan EichlerReviewed by Somer AndersonFact checked by Ryan EichlerReviewed by Somer Anderson

Risk management has always been an important tool in running any business, particularly when a market experiences a downturn. In any economic environment, an unexpected surprise can destroy your business in one fell swoop if you don’t have the right risk management strategies in place to prevent, or at least mitigate, the damage from that risk.

External risks are out of your control. These include, but are not limited to, interest rates, exchange rates, politics, and weather. Internal risks are in your control and include information breaches, noncompliance, lack of insurance, growing too fast, and many more.

The following are some of the areas that business owners can focus on to help manage the risks that arise from running a business.

Key Takeaways

• Risk management is crucial for business survival, especially during economic downturns, as it helps prevent or reduce damage from unexpected threats.
• Businesses face both external risks (like market and weather conditions) and internal risks (such as data breaches and compliance issues) that require different strategies to manage effectively.
• Key risk management strategies include prioritizing risks, obtaining necessary insurance, limiting liability, ensuring quality, controlling growth, and screening high-risk customers.
• Establishing a dedicated risk-management team—whether internal or external—can provide proactive strategies that safeguard business continuity.

1. Prioritize

The first step in creating a risk management plan should always be to prioritize risks and threats. You can do so by using a somewhat universal scale based on each risk’s likelihood of happening: 

• 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.

2. Buy Insurance

Assess liabilities and legal regulations to determine what types of insurance will be required for your business. This might include:

• Life insurance
• Disability insurance
• Professional insurance
• Completed operations insurance

Buying insurance allows you to transfer your risk to insurance companies for a small cost, especially when compared to the potential cost of uncovered risk.

3. Limit Liability

If you’re a sole proprietor, limit your liability by changing to a corporation or limited liability company (LLC). In this type of structure, the owner of the business is not held personally liable for the company’s debts or other liabilities.

4. Implement a Quality Assurance Program

A good reputation is imperative if you want a sustainable business. Customer service is key to success. Be sure to test your products and services in order to ensure 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 by evaluating your testing and analyzing methods.

Note

The leading risks to businesses worldwide are cyber incidents, business interruption, natural catastrophes, and macroeconomic developments.

5. 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 have a procedure to identify poor credit risks far in advance.

6. Control Growth

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 successful.

7. 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 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 and threats. 

What Is Meant By Business Risk?

Business risks can be broad. They can include anything that reduces a business’s profits, makes it incur losses, or harms it in any way. Companies need to identify their business risks, such as adverse weather events or data breaches, and formulate plans to mitigate them to ensure continued success.

What Are Examples of Business Risk?

Examples of business risks include floods, fires, and other such events. Other examples include the closing of suppliers, the bankruptcy of a business that owes you money, an employee stealing from the company, and an increase in competitors in the market.

How Do You Manage Business Risks?

The first step in managing business risks is to identify what the specific risks to your business are. From there, you have to determine ways in which you can remove or mitigate these risks. Then, you can start creating business risk strategies; these should be closely monitored and continuously updated. Use risk management tools such as insurance and contingency plans to help further reduce business risk.

The Bottom Line

Risk management is a form of insurance in itself and is an imperative step for sustainable success. The seven steps above should get you started in shaping a risk management plan, but they are just starting points. A deep dive into your business and industry will help you better shape a risk management plan that could save the business you worked hard to create.

Read the original article on Investopedia.