Risk analysis and risk management

Regardless of your business size, at some point, you will have to make decisions that involve a component of risk. Some are so unpredictable that could devastate your business, while others can cause severe damage. Large enterprises have divisions, and their sole function is to assess risk. It is unrealistic for a small company with a modest budget to assign personnel to such an occupation. Therefore, the responsibility falls solely on the owner. Independently of the size of your company, it is possible to anticipate and prepare for potential threats.

What is risk analysis?

It is a process that aids in the identification and management of prospective complications that could potentially sabotage key business initiatives.

You must first identify possible threats that your business could encounter. Then you will have to estimate the odds of those threats to materialize. While there is no sure-fire analysis, a rigid probability requires a vast amount of information. Data such as project plans, security protocols, marketing forecasts, and other relevant details are necessary to create a suitable risk assessment.

When to use risk analysis

Business risks come in different ways; a practical risk assessment is a distinct blueprint that has to be adaptable for a specific problem.

Risk analysis is useful in many different cases. When planning a project, it can assist in the decision of whether to move forward or not. A thorough examination will anticipate possible complications. Furthermore, taking into consideration and preparing for events such as theft, staff sickness, technology failure, or natural disaster could potentially save your business from doom.

Identify risks

Human. It involves the illness, death, injury, or loss of a person in your business.

Operational. When assessing risk, you should take into consideration operational issues — the loss of assets, failure in distribution, and the disruption of supplies and operations.

Reputational. Loss of a large customer or employee confidence. Factors causing loss of reputation could have a negative impact on your company.

Project. When actual expenses supersede planned budget. Or failure to achieve critical milestones due to internal or external problems.

Financial. Business failure, stock market volatility, capital shortage, or non-availability of funding.

Natural. Weather, natural disasters, an act of God, or disease outbreak.

Political. Taxes, change of public opinion, government policies.

Structural. Handling of hazardous material, building-related issues such as foundation problems, or accidents involving the structure itself.

Run through each of those items and examine if they are relevant for your specific situation. For instance, a business in Oklahoma should always consider the possibility of tornadoes.

For my service business, a field worker is the essence of the company. My entire office staff works tending to the needs of the operator. If one of them does not come to work one day or abruptly quits, the jobs still have to be completed. Assessing the situation and considering my options, I determined to hire an extra person as a “floater.” Unlike the other operators, that person does not have a set schedule. On the days when everyone is present, the worker assists his peers. On days when someone is out, he takes on a full schedule.

Furthermore, human risk also involves much more than someone missing work. Alcohol and drug abuse are also a significant risk when it comes to personnel. Additionally, protecting against theft, and fraud in the workplace might be difficult. Even though we run a background check on the field operators, who are at customers’ houses or businesses, the possibility of theft is always present. Therefore, paying for insurance softens the impact of the risk.

Importance of insurance policies

A vast number of statistics proves that it is not a matter of if but when a circumstance will take place where you will need insurance. Carrying enough insurance coverage can protect you in many ways, including property loss and liability. Consider the following types of insurance to lower your risk:

Business owner’s policy. This is the most common type of insurance speaking in terms of owning a company. The policy protects your property, including third party claims (customer slips and falls on your premises). It may also cover employee theft and similar occurrences.

Professional liability coverage. It protects professionals from claims of mistake, malpractice, negligence, and unfinished work.

Employers practices liability insurance (EPLI). This subject was covered in a previous post, located here. It protects claims by employees and former employees for actions deemed as discrimination or wrongful termination.

Estimating risk

Once all the threats have been identified, the trickiest part is to evaluate the risk. This is a crucial step. You need to gather as much information as you possibly can to estimate the probability of an event.

For example, a contract for your biggest client is coming up for renewal. Over the last few weeks, there was some attrition between you and the manager, and now there is a possibility they will not renew the $150,000/year contract.

Here is how you would calculate the aforementioned.

0.70 (70% chances of non-renewal) x $150,000 (the amount of the contract) = $105,000 (Risk value)

Managing the risk

Once you identified the risk, and its value, you can work to lower its impact. For the previous example, you can take action and be pro-active. Prepare your sales staff to push for new accounts, invest in advertising, and seek ways to cut costs, are just some of the responses you can take.

Avoiding the risk

If the risk is more than you are willing to tolerate, then you should avoid it altogether. It could mean passing up on a project, not going into a business venture, or not executing a high-risk activity. For instance, in my service business, upon complete a detailed risk assessment, I decided to no longer provide roofing repair services. The risk associated with the tasks was more than I was willing to take. Therefore, we provided services to nothing higher than 8 feet.

Control the risk

In some cases, you have to embrace the uncertainty. However, the impact can be reduced by being proactive. There are two different ways in which risk can be reduced:

Preventative action: It aims to minimize the risk by preventing certain events to happen. It may include health and safety training, and cross-training your teams.

Detective action: It identifies the process where something could go wrong. It could include conducting safety testing before the launch of a product or safety classes with your employees.

In summary, considering risk is crucial for your company. Before you bid on a project, purchase a new piece of equipment, or even opening a new office, I strongly suggest using the risk analysis. Familiarize with the area you are operating, and understand all the possibilities that could halt your business operation.