Risk management is a topic which many small businesses would imagine that they do not require, but they probably have already adopted some kind of risk management strategy without even knowing it. Large companies have departments that do nothing apart from plan and implement risk management to ensure that the company benefits from any risk that it takes. Smaller businesses often believe that they should totally avoid any risk to guarantee that they will not experience losses or cause the company to close. However, without risk the company is unlikely to benefit from opportunities that arise. In this article, we shall look at some of the risk management strategies that a company can adopt to ensure that there is limited downside and a potential upside from any risk that is taken.
Risk Management Strategies
To ensure that a company’s loss exposures are minimized, an organization must obtain professional risk management advice. This can be obtained in-house for larger companies with risk management departments or from companies that deal specifically in reviewing a company’s particular risk.
Whatever risk management strategies are implemented, they must be effective and efficient, comply with legal requirements, and that ensure that a business can operate if a loss was to occur. Not every risk strategy can be successfully applied to every type of loss exposure. Therefore, each possible loss exposure should be evaluated to determine which strategy is the best fit.
The most common risk strategy is that of total risk avoidance. This strategy ensures that a business has no exposure to the risk. For example, if a company that manufactures electronic components has the opportunity to purchase and resell fully assembled electronics goods; it can mitigate its exposure by adopting a risk avoidance strategy and not taking the opportunity to sell the finished goods.
Although this strategy allows a company to avoid any risk exposure, it also fails to give the company any potential gain based on the opportunity. Therefore, risk avoidance should only be used when it is obvious that the exposure risks outweigh any potential benefits. In the case of the electronic components company with the opportunity to sell finished goods, it adopted a risk avoidance strategy when it found that the finished goods had been superseded and basically unsellable.
All businesses are subject to risk. This can even be within the company itself. For example, a manufacturing company has the risk that accidents may occur in the manufacturing process. To reduce this risk, the company will look at all aspects to identify areas where the risk can be reduced.
Initially a company must look at its whole process to identify the potential risks. Any risks that are identified should be investigated to find what can be done to reduce the risks, such as increased training, more safety measures, etc. A plan can then be created and implemented to ensure that the risk reduction measures are applied. When these measures are implemented, there must be a constant review process to ensure that the measures still satisfy the risk reduction.
If a potential risk of an opportunity has been identified then a company can decide it would like pursue the opportunity but mitigate the risk. Depending on the type of risk, the company can transfer the risk by purchasing insurance that will pay out if the risk causes a loss. There is a cost associated with the insurance, and this should be less than the benefits of the opportunity.
When a company identifies a risk, it can decide that it does not to employ a risk strategy such as risk reduction or risk transfer, and will keep the risk or some portion of the risk within the organization. For example, if a company identifies a risk, and decides to purchase insurance to mitigate the risk, it may decide to only transfer some of the risk to the insurance company, and retain some of the risk. This is particularly true when the insurance cost is very high and to reduce the cost the company decides to take a large deductable, retaining some of the risk.