The management and control of risk is a vital part of any business’s survival. Many companies, big and small, fail each year in the United States. Most of those businesses fail due to an unforeseen hazard they were not prepared to deal with. Risk management is the process by which a business identifies and prepares for hazards. While each risk management plan is unique to the business, all successful plans follow the same guiding principles.
Plan Is Created in Context
This principle focuses on the uniqueness of the business and serves as a reminder to managers that everything placed into a plan must be considered in the broader context of the industry and company. This includes factors both inside and outside the company itself. Even businesses in the same industry and geographic area may have different risks depending on the detailed nature of the company, it’s culture, workforce and communication.
A risk management plan should thus add value to the specific company and work with that company’s structure rather than against it or outside it. This can only be accomplished with a thorough understanding of the company’s inner workings and its connections to all other outside influences like other industries, business partners and customers.
Reporting and Data Collection
All successful risk management plans have at their heart a comprehensive and efficient system of data collection. Identification of risks and the ability to analyze those risks in time to prepare for them or avoid them can only be accomplished with swift and efficient data collection.
Collection of this data also relies on proper communication and reporting systems. This means that channels for communication should be available at all levels within the company, and the ability to disburse new information, warnings or memos must also be available. The best risk management plan quickly falls apart if new information cannot be added and instructions for avoiding risks cannot be communicated to those who need to know.
Computers are the best tool for addressing this aspect of risk management. Managers today have access to more software (such as Certus) and electronic communications methods than ever before in history. It is important that managers and owners make use of available technology to collect, organize and analyze risk information and quickly communicate the results.
Support Structure and Roles
A major component of risk management is dealing with risks or hazards in a way that minimizes the damage to a company. It is unlikely that even the best risk management plan will avoid all risks. The key to dealing with a hazard before it becomes a catastrophe is ensuring a proper structure and support and clearly defined roles for all staff.
This means that each person must understand the intervention they need to take at their stage in the risk management process. It also means that each person understands who they should support and how they should support that person as the process works toward the resolution of the problem. The plan must account for these human factors because it is ultimately humans who must deal with and resolve the issue.
Uncertainty is the cornerstone of all risk, and there is always some level of uncertainty in business. After all, once something is guaranteed to happen or not to happen, it’s no longer a risk, it’s a reality. There are two basic types of uncertainty: uncertainty about things currently happening, such as the state of the industry or current events, and uncertainty about things that are going to happen. Risk management directly addresses both types of uncertainty and attempts to analyze them. This may mean generally defining the possible type of risk, such as financial or legal risk, and then taking steps toward resolving as much of that uncertainty as possible.
Cycle of Review and Improvement
The final guiding principle of successful risk management is continual focus on review and improvement. No risk management plan or assessment is ever final or set in stone. All plans must be adaptable and able to change dynamically to meet differing conditions and states of the industry. This also means the plan is not only reactive, but follows a continuous cycle of review and change so that is always a step ahead instead of a step behind. A risk management plan that is a step behind probably isn’t doing the business much good.
The plan can only be so dynamic if it is created with a focus on review, change and improvement. When a plan is set up so that it can be easily altered when necessary, it will be better able to respond to an ever-changing business environment. This ensures it is always ready to meet the needs of a company or organization and is never caught off guard.
The effectiveness of a business’s risk management is often the difference between the success or failure of that business. Its importance cannot be overstated, and it is important to ensure that its creation and continued support is an integral part of your business plan.
James Anderson says
Thanks for your informative post. I have got many tecniques that have to be implemented as early as possible.
No business can operate in a risk-free environment and that’s why continuous risk assessment and management are required. You have provided a very detailed post with great insights for every entrepreneur.