02/08/23

How to Manage Business Risks

A vital aspect of running a small business involves managing its associated risks, as no operations are immune to internal or external threats. A risk management plan involves implementing various techniques that can help mitigate or prevent loss.

There are multiple ways a company can organize its risk management plan, but steps commonly consist of identifying, assessing, and managing risks. Businesses also need to continually monitor and review their policies and procedures to ensure their courses of action remain applicable and relevant.

Risk Management is an essential part of owning and operating a small business. Comprehensive plans can improve the safety of business operations and reduce the risk of loss.

Types of Risks
There are several types of risks small businesses may encounter, including the following:

  • Financial risk involves the possibility that a business may lose money, fail to recoup its initial investment or not maintain the cash flow necessary to continue operations.
  • Strategic risk refers to how a business’s decision-making or overall plan may result in loss or a failure to meet objectives.
  • Operational risk relates to anything that could impact a business’s day-to-day functions, operations or business activities.
  • Reputational risk involves threats to a company’s good name, brand or standing with the public or its clients.
  • Hazard risk refers to events that can harm individuals, property or the environment.
  • Cybersecurity and fraud risks relate to events that may occur through shortcomings in a small business’s IT or security systems.
  • Compliance and legal risk refers to the losses that may arise from a company’s failure to adhere to federal, state or industry regulations.

Risk Management Process
While examples of risks are numerous, a comprehensive risk management plan is key to overcoming them. A plan generally includes the following steps:

  • Identify the risk. By carefully examining their operations, businesses can discover several types of exposures that have the potential to create a loss.

  • Assess the risk. After identifying threats, businesses can analyze the probability of the risks occurring and their potential severity.

  • Manage the risk. Following the risk assessment, a business needs to determine how it will address the risks. Options include:

    • Avoidance—Elimination of the risk

    • Modify—Mitigating a risk’s impact or lessening the likelihood of it occurring.

    • Transfer—Shifting the risk to a third-party (e.g., an insurance company) through a contract.

    • Retain—Accepting the risk (or a portion of it) when the risk is deemed acceptable (e.g., it has a low likelihood of occurring or it would have a minimal impact)

  • Monitor and review the plan. A crucial part of the risk management process involves continued monitoring and reviewing of strategies to help prepare for evolving or new hazards.

Risk Management Benefits
Small businesses can receive several benefits from implementing effective risk management protocols. Not only do these protocols mitigate or eliminate potential risks, but they may also lower insurance premiums, as insurers may note how they reduce the business’s likelihood of filing an insurance claim. Insurers may also offer resources to help a business strengthen its risk management practices.

It is never too early to begin risk management planning. Contact our team at Marshall & Sterling with any questions.