Risk-taking is an unavoidable part of business. While big risks can sometimes lead to big rewards however, most business owners try to minimize exposure to them.
There are compelling reasons for taking a conservative approach. Excessive risk can threaten the survival of a company, while mitigating risk often leads to greater growth and profitability. It’s inevitable, however, that sooner or later your business will have to accept some engagement with risk. Here are four best practices for managing business risks – and for avoiding the worst threats to your company.
1. Determine which risks are worth taking versus which ones to avoid.
Proper assessment and being able to identify a good risk versus a bad one is essential in business. A “good” business risk is one that will help profitably expand your target audience and customer base. This could involve entering a new market or introducing a new product. The risks here are calculated, and can be carefully assessed and measured beforehand.
Other examples of calculated risk might include investing in new technologies or expanding marketing initiatives. In both cases, the expected return on investment can usually be determined ahead of time. This makes the likely outcome more predictable – a prerequisite for a good risk.
“Bad” business risks on the other hand are more speculative in nature. They have less predictive outcomes and are often taken due to hasty or poorly thought-out decisions. One common example is attempting to rush a product to market without conducting sufficient research on how customers could respond. This can result in costly miscues, damage to your brand, and lost opportunities. Other poorly conceived risks include taking actions that could endanger customers, injure employees, or run afoul of the law.
Another important consideration to make is your team’s appetite for risk. Do your employees enthusiastically embrace new opportunities, or are they skittish about change? If they thrive under pressure, you may want to charge full-steam-ahead with a new initiative. But with a risk-averse group, you may be better off taking a more measured approach, which could yield better results in the long run. Matching business risk to the risk takers is another key minimization.
2. Take a 360-degree view of the business risks you face.
Risks can arise both internally and externally, and effective business risk management takes both types of threats into account.
Examples of internal risks might include out-of-date business processes, poorly maintained or obsolete infrastructure, disgruntled employees and skill shortages. You can manage and minimize internal business risks by regularly reviewing business performance and the role of the company’s people, processes, and technology. If any vulnerabilities are uncovered, these can be addressed with additional training, new investments, and by instituting appropriate business controls.
External risks stem from the business environment in which a company operates, and includes economic, political, and social concerns. These can range from competitive threats and shifts in customer preferences to unfavorable government policies such as new industry regulations and trade restrictions. A new law may limit what you can sell or where you can sell it, or competition from abroad might jeopardize your profit margins.
External risks can be evaluated using a PEST analysis – a tool for analyzing the Political, Economic, Social, and Technological trends with which the business must contend. To conduct a PEST analysis, your management team should consider each of the four factors and how they relate to the company’s operational and strategic goals. Done correctly, this can lead to more effective strategic planning, heightened awareness of looming threats or hidden pitfalls, and greater insight into potential business opportunities.
Once you’ve drawn up your risk management plan, popularize it throughout the company. Every manager and employee should understand their role in identifying, monitoring, and limiting threats to the business.
3. Aim to proactively manage business risks.
One of the keys to effectively minimizing risk that your company may face is proactive risk management. But be aware, this is not a passive undertaking. Business today is largely digital, which means much of it takes place at the speed of thought. To keep the risks faced by your business in check, you should be able to see around the bend.
This often requires anticipating threats before they materialize. Potential vulnerabilities are first identified and then mitigation plans are formulated, and all of this should be captured in a formal document that is updated regularly.
Once you’ve drawn up your risk management plan, try to popularize it throughout the company. Every manager and employee should understand their role in identifying, monitoring, and limiting threats to the business. In this way, you can mobilize all the eyes and ears available to you to be on the lookout for new dangers, and to be alert for new solutions that can minimize those risks.
4. Reduce risks by turning threats into business opportunities.
The best defense is a good offense, and nowhere does this apply more than to risk management. It’s always good to sidestep a threat, but it’s even better to turn that threat into an opportunity. A new technology, for instance, may have the potential to undermine your business if it renders your products obsolete. But it also has the potential to give you a huge competitive advantage if you’re aware that this technology is coming and make plans to incorporate it into your product line.
The Bottom Line
Taking a “glass half full” approach to risk can be extremely rewarding for your business. But it requires discipline, calculation, and proactive risk management in order to succeed. Risk management begins with carefully assessing which risks are, in fact, worth taking, while realizing that some risks – political, economic, and social, for instance – may be beyond your control. In such cases, employing a PEST analysis can boost strategic planning capabilities while minimizing risk. Just remember: Proactivity is key. A smart risk management plan can keep you poised not only to respond effectively to new threats but also to capitalize quickly on new business growth opportunities.
A version of this article was originally published on August 07, 2019.
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