Small to medium businesses are exposed to risks all the time, which can directly affect day-to-day operations, decrease revenue or increase expenses. Some risks can be serious enough for your business to fail.
Most business owners and/or managers know instinctively that they should have insurance policies to cover risks to their assets, liabilities, income, and people.
Sound risk management should:
- Reduce the chance that a particular event will take place
- Reduce its impact
- Protect business wealth
- Identify threats
- Implement processes to minimise or negate them
Risk is dealt with by avoiding, reducing, transferring or accepting it. However, to deal with it, you must first identify and understand the consequences and/or severity of risk on your business to make informed decisions.
The positive outcomes of a sound risk management approach can be:
- Lower insurance premiums
- Reduced chance that the business may be the target of legal action
- Reduced losses of cash or stocks etc.
- Reduced business downtime
- More profitable business
How does a business identify and manage these risks?
The first step is to identify the events which could cause a loss or disruption to the business to create a Risk Register.
These identified events should then be analysed to ascertain the likelihood of them occurring and how serious the result would be if they did occur.
Start simply by assessing each event based on the likelihood it could eventuate e.g.
1 – ‘very unlikely’ to 5 ‘very likely’.
Prioritise each event by putting a dollar value/consequence against each one (e.g., the replacement cost of a critical piece of machinery; or in the case of potential bad debts, the total value of amounts owed by customers).
A risk profile for each identified event could look like this figure below:
SEO Title: Creating a Business Risk Register
Caption: Identifying risks and ranking them by likelihood and impact helps prioritise what needs attention first.
Alt Text: Business risk assessment matrix and risk register spreadsheet used to identify and prioritise operational risks.
Attend to the most likely and the most expensive events (HIGH) first as these are the ones that will cause maximum disruption.
For each identified risk event, develop procedures commensurate with the level of risk the business is willing to accept with measures to reduce, transfer or mitigate the risk, including continuity planning should an event occur.
Once a procedure is put in place, it should be monitored regularly to ensure it is properly implemented and remains effective.
Insurance policy coverage is a significant and important form of risk transfer. For many businesses, it is a commercially sensible form of risk transfer to pay an insurer a premium at a fraction of the cost it would ordinarily be to meet and overcome a risk issue to ensure business continuity, for example, the fire destruction of warehouse premises.
In certain cases, your business will be required to effect insurance to comply with its legal and statutory obligations to provide its products and services, for example, workers’ compensation insurance and legal liability coverage for leased premises.
Identifying, quantifying, and monitoring your business’s risk exposures will enable you to have a more in-depth understanding of what makes your business effective and how to avoid or mitigate risks that can cause disruption or worse to your business, its owners, and employees.
We can assist with risk management planning and assessment, including business continuity planning. Please ask us for more information.