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Lets talk risk

5 mins  18.07.2017 Sheena Jackson
Risk. It keeps business owners awake at night, and stops many people from starting a business in the first place. But what exactly is risk? And how can you easily identify and mitigate risk in your business.

What is risk?

When referring to risk, we’re not just talking about the ‘big ticket items’ that would cause an obvious interruption to business such as fire, flood, or natural disaster. Depending on the size and type of business, exposure factors can include things such as: illegal workplace practices, loss of employees, inadequate insurance, supplier or contract issues, or even increased market competition.

In my experience, small to medium enterprises (SMEs) can be more vulnerable to risk as often they don’t have the capability, capital, or resources to effectively manage when disruption strikes. Inevitably, when an interruption to business does occur, owner/operators that are unprepared or underprepared are sent off on a new course, operating in crisis mode to address the disruption, and responding to ensure it does not happen again. By overcompensating and reacting to events, resources are consumed with the crisis, and new opportunities are missed.

How do I identify and plan for risk in my business?

The million dollar question is, of course, how do I identify and plan for risk in my business? Well the short answer is that there is no single solution! However, there are a few important questions that you can ask yourself, and tools you can consider, to get the ball rolling.

identify-plan-risk-pie-chart

What are your business goals?

Key to any successful business is having a plan that includes milestones and goals. The plan needs to be dynamic and change over time, however it is important for this to be done so that a guiding framework is established from which decisions can be assessed e.g. does this fit with the mid-term/longer term plan for the business?

What are the opportunities and associated risks?

Once you have identified the opportunities for your business through the planning process, consider the factors that could potentially pose a threat e.g. if your business goal is to grow quickly and in order to do this you need to employ staff, then consider the workplace relations policies and practices you might need to introduce to ensure you are covering your obligations.

Clearly break down the types of risk which may directly impact on the nature of your business, and balance this against your business framework.

What are the other potential disruptions?

Consider also any other potential disruptions that your business might face. It's impossible to foresee every scenario, so at this point in the process, there is often value in looking at external factors or seeking additional input. Assess the broader environment in which your business operates, and/or talk to people in the industry who you trust, and or/ seek advice from advisers. The important thing is to consider the 'unknown unknowns' of your business.

Evaluate the risks against business goals

This is often the most challenging part of the assessment process. The value here is in determining which risks are most likely to have a significant impact on your business. Each business is unique, and there is no 'one size fits all' approach to this.

Rank the remaining risks

There is always risk in business. If you had unlimited cash flow, you might try to mitigate or eliminate every single one. However, this is not a reality, so ranking each identified risk is essential. Start from risks that are highly likely, or that would significantly impact the business, and work your way down the list weighting each risk appropriately. It is likely that individual businesses will prioritise risk factors differently such as: cash flow, reputational or operational risk.

Develop the strategy

Business owners should ask themselves if they are comfortable with the identified risks or not, and develop an appropriate strategy to respond. If you are going to live with the risk, consider the plan for dealing with it, e.g. transferring the risk through insurance or another approach. The priority is to get on the front foot, to determine how your business is equipped to respond if any of the key risks play out.

Revisit the strategy

Nothing stands still for long in business, particularly given the ever-changing markets in which industries operate. This is why it is critical to continuously revisit your risk strategy against your evolving business plan.
By actively considering risk and setting a strategy that is aligned to your goals, capacity and resources, you will become more comfortable with risk, allowing you to focus on the opportunities and vision for your business.

What next?

In my experience, business owners and managers tend to overemphasise the possibility of negative outcomes, letting the fear of failure constrain their creative and entrepreneurial decision making. Identifying and managing risk is a key component of running a successful business. It need not be overwhelming. The first step is being aware of the key risks that your business is exposed to, and the second step is planning for those risks. With a risk mitigation plan next to your business plan, you have a complete picture for your business that will help you map the opportunities for the future
Sheena has a long standing career advising small to medium enterprises and leads MinterEllison's South Australia's SME practice and the Maximise program (insert link). She assists businesses to identify risk and advises on risk management. She helps organisations of all sizes to reach their commercial objectives across the business life-cycle. Previously a business owner and director, Sheena is well equipped to advise businesses on ongoing compliance requirements

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