Does your business free from all risks? Do you have any risk management framework ready to prevent your business from the possible risks? Focus on your goals and targets is undoubtedly the key of success, but preventive plan for certain and uncertain risks is equally important to run a business smoothly. Believe it, there is no road without jerks in the journey of success!
The risk for an enterprise can come in any form, i.e. Inflation risk, Recession risk, Interest rate risk, Liquidity risk, Operations risk, Risks due to natural events (earthquake, snow, flood, storms etc.), Risks due to technology, i.e. software bugs, hacking, virus etc., Industry specific risk, i.e. the risk of cancer or asthma in chemical industries, risk of fire in petroleum industries are just few of the examples.
What happened with Knight Capital in 2012 is an eye opening example. Knight Capital putted its new software to the job on the 1st of August 2012, and within minutes ended up with an immediate pre-tax loss of $440 million due to a small bug in new software. It is considered one of the biggest “technology breakdown” which happened due to poor risk management.
Risk comes from not knowing what you`re doing.Warren Buffett
Do you have some risk management framework for your enterprise? If not sure about how to manage the risks intelligently and how to make a plan of action to cope up from the risks, then you must at least include the following 5 points in your action plan to prepare your risk management framework.
1. Identify Hazards and Risks for Your Enterprise
Identifying and listing the possible risks for your enterprise is the first step of your enterprise risk management framework. There are many possible methodologies to identify the risks in your business including:
- Event inventories
- Loss event data
- SWOT analysis
- Risk questionnaires
- Scenario analysis
You will have a lengthy list of the possible risks in your enterprise after this exercise. Now you have to prioritize the risks on the basis of most possible occurrences depends on your industry and workplace. Then you have to make a “plan of action” for vital few possible risks so that your business should least affect from those risks.
2. Decide Who Might Be Harmed & How
It is very important to decide who might be harmed from the possible risks of your enterprise. It may you (a single identity), your employers, your customers, your stakeholders, your business partners, your vendors, your suppliers, your brand value, your goodwill, your assets or anything else.
It is also equally important to decide how the particular risk can harm someone (or any of the aspect) in your enterprise. For example, if you sell packaged food and your customer knowingly/unknowingly consume the food after expiration date, you must aware how this spoiled food can harm your customer. This kind of risk analysis will help you to quantify the possible risk of your business.
This analysis will also help you to re-prioritize your “vital few” risks (you obtained from the list prepared in step 1) on the basis of quantification or impact of the particular risk.
3. Decide Precautions
Always remember, “Precaution is Better Than Cure.” Once you identify the possible risks for your enterprise, you must decide precautions timely. It will either reduce your risk or at least reduce the effects of risk. For example, if paint industry identifies the possibility of fire at workplace due to extensive use of inflammable chemicals then the risk managers must decide the necessary safety precautions to avoid fire, to fight the fire on time and to give the safe working environment to their work force.
4. Implement Your Findings
No Plan is Useful Without Implementation.
Implement the precautions you decided as soon as possible to reduce the risk so that your risk will reduce in real when it will occur. Better to cross check your implementations to ensure the efficiency of your precautions. In some cases, the mock trials of the identified risk are possible. You can test your precautions by those possible mock trials.
In above example of paint industry, you can easily check your fire safety precautions time to time which will ensure your safety against the possible risk.
5. Monitor & Review Your Implementations
Last but not least, keep your eye on the safety measures you implied to reduce the risk. This monitoring can be done on regular schedules when there is no risk, and can also during the risk. Many times you will find your risk precaution implementations insufficient due to the amount of risk, circumstances, change in technology and many other factors. That time, you can review your risk precautions only if you were monitoring your risk precautions closely. This close monitoring and reviewing process will help you lot to either transfer the risk (i.e. insurance is nothing but transferring the risk) or to reduce the risk.
You Can’t Eliminate Risk, But You Can Manage It Intelligently!!
Write us your comments and experiences about effective risk management to safeguard your business. It may beneficial for others.
Author: Sameer Goyal