Businesses, irrespective of their size, may implement various strategies to thrive, including risk assessment and management. Such strategies, ranging from precautionary measures to process changes, may be useful during unforeseen events like supply chain disruptions and natural disasters. Effective risk management strategies not only help organizations prevent operational complications but also help them prioritize and focus on growth and profitability. There are several risk management strategies for entrepreneurs to identify and avoid potential vulnerabilities.
1. Identify and prioritize risk
A key strategy in business risk management is to prioritize risks and threats. Since various risks weigh differently, entrepreneurs can rely on a universal scale and categorize risks based on their likelihood of occurrence. Risks that fall in the top category should be addressed urgently. But, if a risk falls in a lower tier but may present more financial damage and reputation loss, it should take priority. Those with minimal consequences and fall in the lower category can be addressed next.
2. Create a plan to respond to risk
A crucial risk management tip for entrepreneurs is to opt for appropriate response strategies that align with their risk tolerance and objectives.
- Taking proactive measures to eliminate or avoid the risk entirely is considered a risk avoidance strategy.
- One could consider risk reduction by reducing the possibility or risk impact.
- Entrepreneurs could use the transfer strategy, which is moving the potential impact of a risk to third-party vendors. For instance, one might take on insurance policies with trusted insurance companies which will assume financial responsibility for potential losses associated with specific risks.
- Risk acceptance is another response strategy when an entrepreneur acknowledges the existing risk without taking specific action to address it actively, which is usually done for common, low-impact risks.
To create a comprehensive risk response plan, an entrepreneur must customize strategies based on factors like severity, nature, and types identified—such as internal vs. external risks. An ideal plan aligns with the organization’s risk management objectives to ensure contingency measures are up-to-date with the overall goals and strategies of the business, even if there is a new risk in play.
3. Duplicate records legally for easy data recovery
While one may have to follow guidelines when storing sensitive company and customer data, it is important to make strong duplicate records and store them in different locations. This helps minimize risks associated with data loss due to unforeseen events like fire, system failures, or cyber-attacks. If one data center is affected, the business can always rely on the backup, ultimately minimizing risks in business operations.
4. Purchase insurance
An entrepreneur must conduct a risk assessment in a small or large business to determine what type of insurance they may require. Depending on the risk exposure, they can choose from options like life insurance, professional insurance, general liability insurance, and completed operations insurance. While it doesn’t eliminate risk, investing in a relevant policy will help the business owner transfer risk to the insurance company for a practical cost. The premium is low when compared to the potential cost of losses the risk can cause to the business.
5. Appoint a risk management team
Business owners looking to minimize risks in operations could onboard a few experienced internal employees to constitute a dedicated risk management team. This helps in minimizing the costs of hiring an outside firm for the process. The risk management team can assess potential risks to the company and set up strategies to reduce or prevent them immediately. But, if the risk is complex and requires specialized expertise, it is best to invest in an external risk management team.
6. Limit liability
Entrepreneurs who are sole proprietors should restrict their liability by changing to a corporation or limited liability company (LLC). In this structure, the owner of the business is not held personally responsible for the company’s debts or other liabilities.
7. Train employees
The growth of the organization relies heavily on employee training. If a business sells products and/or services and sets unrealistic goals for employees, they may take unwanted risks to achieve them. This could trigger a poor reputation for the company among customers and lead to permanent losses over time. Instead, an entrepreneur must train employees to focus on quality, understand and follow industry regulations, and maintain service standards.
8. Put a cap on high-risk customers
If a business is new, an effective risk management technique is to limit high-risk customers. The organization must have a proper screening process to identify such clients in advance based on payment behavior, reputation, legal disputes, and credit history. For instance, guidelines must be in place requiring customers with poor credit history to pay ahead of time to avoid financial complications for the business in the long run.
9. Focus on quality assurance programs
Reputation is everything to a business, and it heavily depends on the quality of services and products it offers. Poor-quality products may lead to financial losses and customer dissatisfaction. This is why an entrepreneur must invest in a quality assurance program (QAP). One must ensure the products and services are quality tested to avoid sending out flawed batches. Testing and analyzing the lineup is one way to follow through with a quality assurance program. The QAP will also help the business handle risks successfully and take a step forward where growth is concerned.
10. Constantly monitor and review risks
Risk monitoring and periodic reviews are integral to businesses. It ensures the risk management framework for businesses is relevant, adaptive, and aligned with the objectives of the organization and changing risk landscapes. Some useful approaches include periodic risk assessments, implementation of feedback mechanisms, use of key performance indicators (KPIs) and risk metrics, and initiating scenario planning and stress testing among employees.
