“Risk comes from not knowing what you’re doing.” – Warren Buffett
And as a business owner, risk comes from not knowing what threats pose a risk to your livelihood. The first step toward being “in the know” is to understand and embrace the concept of risk management.
What is risk management?
It might not sound exciting, so even learning the basics of risk management might seem like a chore. But risk management is an essential practice for business owners. It involves identifying, assessing, and prioritizing potential risks, and putting strategies in place to minimize their impact.
The three key components of risk management include:
- Risk identification: Identify and understand the potential risks that may affect your business. These risks can be internal or external, such as financial, operational, or strategic risks.
- Risk assessment: Assess the identified risks in terms of their likelihood and potential impact. This helps you rank each risk and set aside the right amount of resources.
- Risk mitigation: Develop and carry out plans to reduce the likelihood of a risk becoming reality. This may involve implementing safety measures, conducting regular building inspections, or developing back-up plans with your staff.
Why is risk management important?
Whether it’s physical assets like property, equipment, or inventory, or intangible assets like intellectual property or customer data, business owners must take measures to protect themselves from potential risks.
Investing time and resources into risk management will allow you to:
- Minimize financial loss: Identifying and addressing potential risks helps in reducing financial losses that could result from events not on your immediate radar.
- Enhance decision-making: A complete understanding of risks give you the confidence to be decisive when faced with a problem.
- Improve operational efficiency: Risk management helps you locate areas of vulnerability or inefficiency, then take the appropriate steps to improve things – whether it’s adding staff, investing in new software, or embracing AI.
- Protect reputation: Managing risks helps in maintaining your positive reputation among customers, clients, and employees. You’ll earn their respect by demonstrating a commitment to safety and responsible practices. Johnson & Johnson’s Tylenol crisis in 1982 is a perfect example.
Best practices for risk management
The two most common practices are traditional risk management (TRM) and enterprise risk management (ERM).
TRM focuses on managing risks in a specific area of a company or organization. As an example, executives of a paper mill might assign a risk management team to focus solely on safety risks in the wood yard.
In general, this risk management approach tends to be more reactive, with an emphasis on mitigating risks that have already been identified, rather than seeking out new risks.
Meanwhile, ERM takes a more comprehensive approach to finding, assessing, and managing potential risks. Whereas TRM is often driven by a single department, ERM is typically integrated throughout the entire company, resulting in more employee input.
Larger companies have been adopting this approach in recent years, often employing a Chief Risk Officer (CRO) to coordinate risk management efforts. And while ERM is a better fit for large companies, small businesses can apply ERM concepts to foster a more proactive approach to risk management.
What’s one step you can take today? Make sure your business is properly insured. Connect with a local Rural Mutual agent to set up a customized protection plan for when the unexpected happens.
