Risk Identification and Management? Why Do I Need it?

Risk Management
  • No business is ever safe from different types of risks. Those risks can be related to company finances, business strategy, reputation, etc. But they all have a very crucial impact on your business development.
  • Larger companies and big corporations have a special risk management department to assess risks and ensure the most beneficial development for the company.
  • If you are just starting out or haven't yet developed proper risk management strategies, you should definitely learn more about business risks to be prepared for them.

business risk management

Businesses face all kinds of risks every day and mainly most are well-prepared for them. Large companies tend to have a huge "risk management" department looking at threats to profits and it’s important that SMEs adopt some form of risk management strategies or work to develop risk identification and awareness within their business.

The risk management process for a lot of smaller companies begins and ends with health and safety or physical risks. What about the risk of competition; market conditions; technological security or lack thereof, or emerging industry disrupters? These are things no business should take for granted.

Risks can be broken down into 5 main categories; strategic, financial, operational, compliance, and reputation.

Financial risk management

In some ways all risk comes back to finances, be that loss of revenue or increased costs, financial risk refers specifically to cashflow. This is the area most companies focus on the hardest in their risk management strategies, but the ones who stop here are ironically the ones most likely to suffer from it.

Strategic risks, governance risk and compliance

The key areas to develop more awareness in is strategic, operational and reputation aspects. Keeping on top of governance risk and compliance is as simple as making sure it doesn’t evolve into a strategic risk.

Poor strategy, failing to anticipate market shifts or adapt to change, is one of the most common reasons for business failure. No company is too big to be insulated from strategic risk. Ask Blockbuster, Nokia, Borders, BlackBerry, SunMicrosystems or Kodak to name a few businesses who have suffered from strategic “epic fail.”

Operational risk management

Operational risk management is about identifying potential risks within your business and proactively warding them off before they develop.

There are straightforward risks like server or telecoms failure and employee absences, but are you focused on self-made risks like inhibitive processes that threaten your reputation and profits?

Reputation risks

Reputation is everything and loss of reputation can be hard to come back from. It’s not just about how your customers see you but how your employees and potential employees see you. These are the people who will identify risks on your behalf, who will recognise or even create the very technologies that could be a threat to the survival of your business.

These risks can be managed simply by implementing an internal risk management process to keep you apprised of trends and changes in your industry and ideas from your future competitors.

From a consumer angle, data-mining intelligence gathered in a database from surveys and other feedback mechanisms can be utilised to predict changes in the market or identify patterns. The more you know, the less difficult a transition seems.

How to avoid business risk?

Internally it should start with creating and recruiting the right culture at every level. Fostering a culture that is comfortable with change and adaptation will keep you ahead of your competitors when seismic shifts occur as they always want to do.

With the right sponsorship, internal project teams are ideal sources of market knowledge and fresh ideas. Encourage initiative and creativity internally and externally. Look at supporting or collaborating with startups, whether that is a mentoring or financial relationship. It’s possible you’ll be helping create your next acquisition.

Encouraging your future competition can actually be quite healthy. In the 70s a Kodak engineer developed a digital camera but rather than encourage this invention and drive it to market, they buried it. Sometimes it’s better to slowly cannibalise yourself than to sit back and wait for others to pick at your carcass — Kodak sure realise that now.

Collaboration should not be the exclusive domain of external partners; internal collaboration should be the new foundation of your business. Interdepartmental rivalry or distinction is a thing of the past. There is much that can be learnt about improving process and, in its turn, profits — simply by tearing down walls between divisions and bringing employees closer together. For example, marketing can help IT better understand technology developments, and foster discussion around what is possible from an IT perspective and help fuel creativity.

Now, more than ever, businesses need to be aware of risks threatening their businesses. Developing a risk management process to understand what your competitors are doing, what your customers are thinking and what innovations are being developed in your industry has never been more crucial to survival.

Do you have a risk management department in your business? If yes, what are the main risk management strategies they implement?

Peter Khalil

at Perris Knightsbridge Chartered Accountants

Comments (1)
Jef Lippiatt

Jef Lippiatt, Owner at Startup Chucktown

Many businesses are bogged down more by internal threats rather than external threats due to company structure, bureaucracy and the failure of advocates to champion new ideas from individuals and departments. Risk must be managed not removed.