Risk & Assurance

How to mitigate risks in Business?

Risk is inevitable in business. It can come in various forms, and although no business can hope to escape risks unscathed, with risk management, companies can limit the type and the extent of risk that they will suffer. Considering the present times of pandemic, finding ways to mitigate risks in business is not just crucial for expansion but also to achieve financial stability and survival.

What are some of the risks in business?

In order for you to mitigate risks, you should first identify risks. Risks can be of the following forms:

• Structural business risk

The structural business risk^[1] stems from the foundation of the business. It involves partnerships, ownership, investors, etc. Apart from these, your chosen operational strategy will fall under this risk source. It is one such form of risk that you can be sure about and aware at first.

• Execution risk

When you have a plan or a blueprint for your business, you would then be exposed to this risk. There are many factors that contribute to business risk, but in this case, it is attributed to not external forces but to people running the show. You can have the best business model and strategy, but failure in execution can have severe consequences. Examples of these risks are poor management or product development.

• Investing risk

Another source of risk can come from the investments that you make. You would be aware of the fact that in business, you need to manage your spending well in order to use your capital in the best possible way.

• Integration risk

Then comes risks in business that results from integration. Integration in business means how your plan, strategy, and investments intertwine.

• Misalignment risk

Risks can stem from misalignment issues as well. As a business owner, you may have goals and milestones to achieve, and you work hard for it, but sometimes these are not tied in with how you run the business.

• Governance risks

If the leaders in a business are not participative in business processes, then there is a likelihood of governance risk. Not devoting time to a certain area where it is required, can lead to governance risk.

• Technology risks

Technology risks are always there in our global business structure. Some of the most common types include telecommunications failure,  hardware and software failures, incorrect or inefficient use of technology.

• External risks

Lastly, external risks are caused by external forces which are not controllable but can cripple your business or even bankrupt you. It can be in the form of international conflict, pandemic, cyber attack, terrorism, etc.

What you need to do?

Everyone knows that risk is a threat to the financial health and operational continuity of business.

In order to limit the business risk effectively and to ensure that your approach is flexible and comprehensive to cover risk factors, you need to do the following:

• Understand different forms of risks;
• Perform a risk assessment;
• Measure the impact of every potential risk and rank accordingly;
• Develop contingency plans based on risk prevention, risk mitigation, risk sharing etc.; and
• Establish protocol to monitor risks levels and identify new risks.

Mitigating risks in business

Once you know the kinds of risks that you may encounter, the next step involves developing a risk management strategy to either prevent them or minimize its sting.

Following are some of the risk mitigating steps to consider:

• Perform a detailed risk assessment

While reviewing potential risk, you can assign it a risk level such as-

1. Extremely likely;
2. Moderate probability of occurrence; and
3. Minor probability of occurrence.

You can further refine this assessment by reviewing each risk based on its potential impact.

• Develop contingency plans

With your risks neatly organized, you can develop a contingency plan or even multiple plans for how to handle each one. For every risk identified, decide which combo of risk prevention, risk mitigation will work best to protect your business.

• Develop and implement risk monitoring and management plans

Your business risk management plan is only useful as your current risk level. Constantly evaluating risk exposure and ensuring that you have contingency plans will help you to keep operations ticking along and avoiding costly errors created by risks in business.

• Employ risk treatments

Risk mitigation strategies should be created with the following risk treatments:

1. Avoidance– Eliminate the risk or withdraw from the risk.
2. Reduction– Optimize and mitigate risk. Identifying high potential scenarios allows businesses to manage risk. It can reduce the potential downtime of the business.
3. Sharing– Transfer the risk by outsourcing the threat to a third party like an insurance company.
4. Retention– Accept the risk and budget accordingly.  It means the company should be able to afford to keep the risk on board as there are enough risk control measures.

• Monitor and review

All risks in business that have been identified should be monitored and reviewed regularly by a team, and implementation should be driven from executive and board level to team leaders.

Conclusion

It may be noted that a risk management policy can protect a business as it ensures that a business deals with a specific risk promptly and correctly, thereby protecting the business operations as well as its reputation. Risk will always remain a part of doing business, but by identification, proper assessment, and developing plans to mitigate risks in business can help your business to be insulated against excess risk.

Read our article:Everything You Need to Know About Business Risk Management