Risk management is a process in which businesses identify, assess and treat risks that could potentially affect their business operations.
A risk can be defined as an event or circumstance that has a negative effect on your business, for example, the risk of having equipment or money stolen as a result of poor security procedures. Types of risk vary from business to business.
You must decide on how much risk you are prepared to take in your business. Some risks may be critical to your success; however, exposing your business to the wrong types of risk may be harmful.
The most common business risk categories are:
- strategic –decisions concerning your business’ objectives
- compliance –the need to comply with laws, regulations, standards and codes of practice
- financial –financial transactions, systems and structure of your business
- operational –your operational and administrative procedures
- environmental –external events that the business has little control over such unfavourable weather or economic conditions
- reputational –the character or goodwill of the business.
Others include health and safety, project, equipment, security, technology, stakeholder management and service delivery.
Your risk management plan should detail strategies for dealing with risks specific to your business. It’s important to allocate time and resources to preparing your plan to reduce the likelihood of an incident affecting your business.
You can develop a risk management plan by following these steps:
Undertake a review of your business to identify potential risks. Some useful techniques for identifying risks are:
- Evaluate each function in your business and identify anything that could have a negative impact on your business.
- Review your records such as safety incidents or complaints to identify previous issues.
- Consider any external risks that could impact on your business.
- Brainstorm with your staff.
Ask yourself ‘what if’:
- you lost power?
- your premises were damaged or not accessible?
- your suppliers went out of business?
- there was a natural disaster in your area?
- one of your key staff members resigned or was injured at work?
- your computer system was hacked?
- your business documents were destroyed?
You can assess each identified risk by establishing:
- the likelihood (frequency) of it occurring
- the consequence (impact) if it occurred
TIP: The level of risk is calculated using this formula:
Level of risk = likelihood x consequence
To determine the likelihood and consequence of each risk it is useful to identify how each risk is currently controlled. Controls may include:
- engineering controls
- administrative controls
- personal protective equipment.
A risk analysis matrix can assist you to determine the level of risk.
Managing risks involves developing cost effective options to deal with them including:
Avoid the risk - change your business process, equipment or material to achieve a similar outcome but with less risk.
Reduce the risk - if a risk can’t be avoided reduce its likelihood and consequence. This could include staff training, documenting procedures and policies, complying with legislation, maintaining equipment, practicing emergency procedures, keeping records safely secured and contingency planning.
Transfer the risk - transfer some or all of the risk to another party through contracting, insurance, partnerships or joint ventures.
Accept the risk – this may be your only option.
You should regularly monitor and review your risk management plan and ensure the control measures and insurance cover is adequate. Discuss your risk management plan with your insurer to check your coverage.
- Read CPA Australia’s publication Risk management guide for small to medium businesses
- Develop a business continuity plan to deal with unexpected events
- Ensure your business has adequate insurance
- For more practical advice and tips, see our Managing risk section of our blog.