Part of any business plan includes managing risks. At any moment, a company’s reputation and financial sustainability can be put on the line. Everything from emerging competitors to natural disasters requires strategies that help stakeholders lessen or avoid the impacts.
While risk management should be a top priority for executives and owners, it can get put on the back burner. The demands of day-to-day operations sometimes supersede a list of what-if scenarios. However, a lack of planning can lead to poor decisions and exacerbate crisis moments. Here’s how to get ahead of business risks by eliminating or mitigating them.
Use Holistic Methods and Tools
Every organization has a unique way of operating. Internal processes, procedures, quality standards, and acceptable behaviors work to form a distinct culture. At the same time, these norms and guidelines help ensure a business accomplishes its goals and uses resources effectively.
Potential risks are forces that could prevent a company from successfully achieving its objectives. Managing threats involves relying on internal processes to determine what they are and how to respond to them. Alongside this are rules and laws businesses must follow to comply with government and industry standards. When put together, these separate pieces form what’s known as governance, risk, and compliance, or GRC.
GRC is a way to treat risk management as part of a holistic approach. Establishing strong guardrails against potential perils is difficult if processes and standards become disjointed. For instance, laws and industry guidelines influence how a business should protect consumer data and privacy. But if executive management isn’t 100% aware of the IT team’s procedures, it’ll be challenging to implement checks and balances.
And without good oversight and visibility, poorly designed procedures expose a business to more cybersecurity threats. A preventable data breach means legal liabilities and industry standard or certification violations. Plus, there are reimbursements for consumer damages and the loss of future revenues. Fortunately, a GRC tool can increase visibility and transparency about risks and insufficient processes. Stakeholders can correct deficiencies before they lead to disaster.
Include a Contingency Plan
To make a contingency plan, you have to anticipate worst-case scenarios. Think of a tornado striking your production facility, an employee embezzling millions, or a ransomware attack shutting everything down. While it’s not likely all of those threats will happen simultaneously, it’s conceivable. Good risk management assesses the probability of worst-case scenarios and develops response plans, including contingencies.
When disasters strike, small and medium-sized businesses tend to be more susceptible. About 40% of SMBs never reopen after a natural disaster. Another 25% close up shop within a year of reopening. Contingencies like insurance and disaster recovery procedures can help prevent this.
Contingency planning is meant to put tools and solutions in place that allow companies to bounce back from worst-case situations. These backup plans can also buffer the negative effects of disasters and manifested risks. Maybe you have other facilities you can easily convert into production floors if your main location is out of commission. Or perhaps you keep a vendor on standby that can jump in and temporarily take over.
Making contingency plans builds redundancy into your organization and its processes. As long as you list out each threat and its likelihood of occurring, you can determine a workaround or response. While you hopefully never have to use them, you’ll at least have blueprints for action.
Diversify as Much as Possible
If you invest, you’re familiar with the practice of diversification. Putting all your money into one stock is a bad idea for a reason. You increase your risk of loss because your investment depends on a single stock’s performance. When that stock underperforms, your money could be wiped out within days or weeks. But you reduce your investment portfolio’s chances of losing value if you put your money in multiple stocks and bonds.
Similarly, businesses with one product or service are more vulnerable to loss. The same goes for companies that sell to a single market or customer. These organizations become dependent on one revenue stream, increasing the chance of failure should that stream go dry. The impacts of disruptions and competitors also become more severe.
For example, global supply chain disruptions are touching nearly every business today. However, some industries and companies may be more susceptible because of a lack of diversification. For instance, a shortage of semiconductors caused a 2.3 million shortfall in North American auto production in 2021. Other products that use semiconductors, like smartphones and HVAC equipment, have also been in short supply.
Businesses that sell these items can’t meet revenue targets if sufficient product isn’t available. In the meantime, what some of these companies can do is pivot. Heating and cooling contractors could shift toward selling services, such as maintenance and protection packages for existing HVAC units. Cellular carriers could also put more effort into selling services, or they could lease the use of their towers. The more options you build into your business model, the less likely you’ll bear the full brunt of disruptive forces.
Dealing With Risk
Opening a business is inherently risky. There may be plenty of rewards in store, but you must overcome obstacles and ward off threats to achieve them. Holistic management approaches and tools, contingency plans, and diversifying business lines are ways to remove as much risk as possible. While risks will always exist, these strategies can help businesses avoid or reduce their negative effects.
