Risk Management Strategies
Risk management is extremely important for business success. Large and small businesses alike have risks that must be managed. Failure to manage risk properly can be devastating.
Risk simply means uncertainty of loss, or chance of loss; the greater the uncertainty of loss to your business the greater the need for controlling those chance of loss possibilities.
Every business has one primary risk that if left uncontrolled will destroy it. Identifying this primary risk category really is not difficult. The reason is because where your strength is your weakness is also.
The fundamental, primary function of a business is where the most risk lies. It is in the primary function of a business that its strength rests. And, it is there also that its most vulnerability rests as well.
Some examples might help to explain. The following are some business categories with their associated primary risks.
Foreign manufacturing - political risk
Bank - credit risk (loan default)
Pharmaceutical company - product liability risk
Coal mine - employee safety risk
Trucking company - vehicle accident risk
Lawyer - failure to close cases risk
Physician - medical malpractice risk
You can see from these examples that the major risk factor is in the primary business function of the business categories.
The task for the business owner or manager is to identify the primary function of their business and its associated risk. Next, the risk can be managed to prevent damage to or failure of the business as a whole.
Risk management industry standard operating procedures to manage risks are to,
Transfer the risk to another party,
Avoid the risk,
Reduce the negative effect of the risk (mitigate it), or
Assume (accept) the risk.
Transferring the risk might include outsourcing the part of the operation that is causing the risk, but that is really not practical in many cases because you cannot outsource the primary function of your business. It might also include buying insurance to transfer the risk which can be helpful.
However, it is very difficult to transfer all of the risk to another party when it comes to your primary business function. No one is going to take all the risk, and get only a part of the reward.
Avoid the risk is not practical either when it comes to your primary business function. It is assumed that you desire to be in business.
Mitigate the risk can be practical, but you need to make sure the element of risk that remains will not cause major damage to your business.
Assume or accept the risk is not often practical because leaving the risk unmanaged will reach up and bite you in the rear. So, all that is left from a practical standpoint is to,
- Remove the risk as much as possible, and/or to
- Mitigate the risk to the point where it is not a danger to your business.
Removing the risk means engineering your business
to eliminate the severity of the chance of loss to your customers and thus, to your business. This will take some doing in many cases, but the rewards far outweigh the pain of the undertaking.
Your brand will benefit from
positive public perception,
positive promotion of your brand from customers and the public,
greater revenue, and most importantly
peace of mind.
Effective mitigation strategies are basically the same as elimination strategies. You want to create, engineer your business to reduce the uncertainty of loss to the point where it is not a threat to the well being of customers or your business.
The time you spend on risk management will pay big dividends in the long run. Time well spent will make your customers happier, and make you happier.
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