Organizations must enact risk management strategies to protect themselves in today’s economically uncertain times. While economic growth is slowly coming out of its COVID slump, the threat of a recession still looms over businesses. The disruption to U.S. and global markets has closed many companies nationwide. Business leaders face unforeseen challenges as well as a reduction in consumer spending. The key to business resilience is developing and executing a comprehensive risk management plan and implementing strategies that transfer risk.
Risk Management Vs. Risk Mitigation: What Is the Difference?
Although some people use the terms risk management and mitigation interchangeably, some important differences exist. Risk management consists of determining what risks a business faces and developing plans to avoid them or lessen their impact.
On the other hand, risk mitigation involves preventative and proactive strategies. By taking certain actions in advance, companies can reduce the likelihood of risks occurring in the first place.
Often, a business may incorporate risk mitigation into a comprehensive risk management plan.
What Are Business Risks?
Companies are exposed to various threats that can obstruct their financial success. The main risks include the following:
Of course, most risk factors will affect a company’s business finances. The bottom line for any company is profitability. However, when referring to a company’s financial risk, it means the liquid assets and cash flow. Too high a debt load or having most of your revenue attributed to one or two customers can affect this.
Businesses are regularly making plans for greater ROI. Strategies to increase revenue always carry a degree of risk. There is no guarantee that success will follow a company’s actions. Even ideas that seem surefire can fail. When this occurs, the company incurs losses. With a risk management plan, businesses can determine the strategic challenge of a venture and make the best decision.
Brand Image Risk
A business’s brand image is directly linked to its reputation. If the reputation diminishes for any reason, it could cause you to lose customers and investors—reputation risk results from poor online reviews from customers or employees and negative publicity about an unsafe product.
Operational risks may consist of anything that threatens everyday tasks and activities. These can include equipment or technical problems, like power outages, or problems with internal protocols, such as issues with employee training or a failure in procurement.
Hazards can occur at any time. In some instances, the threat is from a natural disaster, such as weather damage and fires. Other times, the hazard threat is due to worker injury and the ensuing liability.
Strategies to Develop a Risk Management Plan
Creating a risk management plan is pivotal in a successful and profitable company. Listed below are risk management strategies that provide business protection if executed properly.
Identify Potential Risks
You can’t tackle business risks if you don’t know what they are. The first step in any risk management plan is to identify potential threats. Business leadership can brainstorm about potential risks from various standpoints. Anything that might hinder the profitability of the business is a risk. Next, prioritize the risks in order of most detrimental to least detrimental. Doing so allows companies to know what problems to plan for first.
Assess the Impact of Risks
After you list the risks, assess how each may affect the business’s growth, stability, and current effectiveness. Using a “SWOT” analysis is a sure way to conduct a thorough review of the risks’ impact.
SWOT stands for strengths, weaknesses, opportunities, and threats. A business can expose strengths and weaknesses through teamwork while searching for opportunities and threats. This analysis may lead to reprioritizing the list of risks based on a company’s SWOT. For example, some companies may rank a risk higher or lower due to the following factors:
- If it occurred, it wouldn’t affect them as much as other threats.
- The threat doesn’t apply to their type of business.
- They have internal strengths that combat a particular threat.
- They have certain weaknesses that make them more vulnerable to risk.
Create a Plan to Address Risks
Now, it’s time to create a plan to address the risk factors. You’ll start with the risks that pose the highest threat level and have more serious consequences if they occur. For example, a company that relies on local deliveries may employ in-house drivers, which, in turn, presents a significant chance of accidents.
Since some risks can’t be avoided (or mitigated), businesses can respond to potential threats by controlling the environment or transferring the risk. Controlling the environment in the example above would not be possible because you can’t always control driving accidents. You can ensure your drivers are properly and thoroughly trained, however.
Of course, a business could choose not to offer delivery for its products. However, if that isn’t practical, the only reasonable choice is to use a third-party delivery service. Either way, you are transferring liability.
Once you have implemented a management plan, assessing how it’s working is crucial. Suppose the company eliminates a service due to an inability to control the risk factors. In that case, they must evaluate whether this move affects their profitability.
Businesses can assess the progress of choosing to transfer liability. Are they receiving a tailored insurance solution that addresses their specific industry risks? By monitoring the outcomes of a risk management plan, business leaders can determine what next steps they may need to take.
Achieve Business Resilience with Proactive Planning
Once a company identifies the risk factors, it can move to risk mitigation through the help of top insurance solutions. Transferring liability is an instrumental component of a business plan to reduce risks.