Running a business involves a lot of uncertainty. It doesn't matter how great your business is doing right now, there is always a possibility of things not turning out the way you originally planned and taking a turn for the worse. That said, when we talk about business risks, we often associate them with factors that can cause financial losses for your business. Yes, profitability is important in determining a business's fate, but it's also important to be aware that numerous other threats can cause your business operations to collapse.
While there is no foolproof way to eliminate risks completely, business owners can avoid or minimise their impact by implementing a strong risk management strategy. Understanding and managing risks helps you gain greater control over your business and makes you more resilient to tackle future challenges.
Steps to manage business risks
1. Identify potential business threats
The first step in executing a risk management strategy is to clearly understand what type of risks you're facing now and which you will likely face in the future. Keep in mind that threats to your business can come from both internal and external sources. Thus, it's a good idea to get opinions from your employees, customers, investors, risk advisors, and government agencies to know about potential pitfalls and scenarios where things can go wrong.
2. Evaluate your vulnerability
Once you've researched and compiled a list of all the possible threats to your business, it's time to evaluate:
What are the odds that these risks will occur?
How severe would their impact be?
How much financial loss will your business incur from it?
How long will it take for your business to recover from that impact?
Once you thoroughly analyse these factors, you will know which risks to prioritise and where to spend your resources to manage them.
3. Take control measures
Risk management involves taking effective action to reduce the likelihood of the risk, as well as creating a strong backup plan to protect your business from it. The strategy you choose to defend your business can vary based on the nature of the risk involved. However, it's important to ensure that the benefits of investing your time and money in risk management far outweigh the potential harm. Once you have a strong risk management plan in place, it’s critical to review it on a regular basis and make sure it's still relevant and effective at guarding your business in its current state.
Types of business risks
To give you a better picture of the challenges your organisation can face, we've listed five different types of business risks to help you understand how they can affect your business and what you can do to protect yourself.
Financial risk is any threat that could cause your business to lose money and fall behind in meeting its financial obligations. While most business risks end up causing financial hardship in some way, financial crisis generally arises due to a sudden dip in sales, late payments by clients, market fluctuations, or spiralling debt.
Tips to manage your financial risks:
Take steps to improve cash flow in your business
Maintain an emergency cash reserve
Set clear terms and penalties for late payments
Avoid borrowing money or taking loans unless absolutely necessary
Invest in reliable accounting software to keep track of your business's finances more efficiently
Every business has competition. That said, if a new competitor's entry or the conduct of your existing rivals begins to impact your business significantly, it becomes a clear cause for concern. Competitive risks usually lead to shifts in customer preferences, increased employee attrition rates, or pricing pressure. As a business owner, it's important to keep an eye on your competitors and be ready to take the necessary strategic actions to make your unique value propositions stand out.
Tips to stay ahead of your competition:
Prioritise building a loyal consumer base
Ask for and act on customer feedback
Price your products competitively
Invest in product research and development
Regulatory risk refers to the possibility of your firm suffering damages due to changes in laws or regulations. When your organisation fails to comply with industry-specific standards, rules, and ethical conduct, you may be subjected to hefty penalties or lawsuits that can damage your hard-built reputation.
Tips for complying with changing regulations:
Seek legal advice from a consultant or hire a full-time compliance officer
Ensure all your employees are aware of any new laws or regulations
Conduct compliance audits on a regular basis to verify if regulations are being followed at all levels of the organisation
Risks to health and safety can occur anywhere, but naturally you should aim to make your organisation as safe as possible for employees. Workplace risks involve anything that can cause them physical or mental harm. As a business owner, you are ultimately responsible for preventing injuries or deaths at your work locations, and the space you provide for employees should be free from discrimination, bullying, and harassment. Since workplace laws may vary by state, it's best to seek guidance from the WHS authority of your state to learn more about the specific laws that apply to your place of work. If you're interested in understanding more about workplace safety, visit the Safe Work Australia website. Safe Work Australia (SWA) is an Australian government statutory body that helps businesses comply with Workplace Health and Safety laws.
Tips for minimising workplace risk:
Regularly inspect your workplace for potential hazards
Assess if your business adheres to all necessary safety standards
Train all your employees on how to handle emergency situations
Ensure your business meets the mandatory requirement for having an adequate number of workers who are trained in first aid
Learn more about how to reduce the spread of illness at your workplace
Environmental risks are unforeseen natural calamities that can adversely impact your business. Disasters like bush fires, floods, rain, earthquakes, and cyclones can cause irreparable losses to your organisation. While humans have no control over nature, we can prepare a disaster recovery plan and take necessary precautions ahead of time. Then, when a natural disaster occurs, it's more likely that you can overcome the damage and resume normal business operations faster.
Tips to minimise environmental risks to your business:
Purchasing comprehensive insurance helps you reimburse financial loss due to natural disasters
Keep a copy of all your important documents and business data in a cloud-based storage system
Read more on how to protect your business from a natural disaster on the Insurance Council of Australia website
We hope this post gives you some clarity about risk management and what you can do to keep your business steady and running. Have any other tips you'd like us to add? Let us know in the comments below!