Business Risk Comes in All Shapes and Sizes. What’s Yours?
Are you one of those people who has an “if only…” section of your closet? You know, a designated spot for those things you loved to wear back in the day and might like to wear again at some point— if only you could figure out how to make them fit?
The same concept is also at play when it comes to risk management. Many companies are hanging onto their “if only…” strategies when it comes to mitigating risk.
One size does not fit all
As companies grow and change, so do the various risks they face. A small business just getting off the ground, with a couple of employees and no location to speak of will have very different concerns and exposures than a multi-national corporation with offices around the world.
Part of your job is assessing and managing your business risks not just once, but repeatedly as your organization continues to develop over time. You’ve got to be able to tell when the “if only…” risk management are no longer a good fit. This will allow you to embrace the “what fits your business today” strategies.
There are several types of business risk you’ll need to consider, identify, and manage.
Strategic Risk is associated with your business plan, model, direction, and environment. Even the most well-thought out strategies and plans don’t always work out as anticipated. Sometimes the market, the economy, or some other factor can cause your business model to become weak, unsustainable, or obsolete.
Operational Risk comes from the hidden dangers inherent in the day to day process of running your organization. These could be issues related to system failures or breakdowns in policy or processes. They could also be external events such as theft, fire, or natural disasters. Anything that interrupts your core operation is considered an operational risk.
Compliance Risk refers to your exposure to legal fines and penalties resulting from failure to comply with applicable laws and regulations that pertain to your industry, business, and operations. This encompasses a wide spectrum of issues, including misclassification of employees, safety and environmental violations, discrimination claims, privacy issues, wage and hour violations.
Human Risk is caused by the people who run your business. Humans are not always consistent or predictable. Employees can create risk for your business in a variety of ways: Errors and mistakes, poor management, unsafe practices, inadequate training, theft, fraud, harassment, etc. The more employees you have, the greater the risk. But even if you’re a sole proprietorship, you’re still only human. At some point, you could put your own company at risk.
Technology Risk is associated with the technological systems your business relies on. Power outages, software failures, security breaches, cyber-attacks, and other technology issues can cause anything from minor interruptions to major catastrophes. The same technologies that help you run your company more effectively and efficiently can also wreak havoc on your organization.
Financial Risk is anything that interferes with the ability of your business to maintain positive cash flow. Financial risks can be internal or external and include things like market fluctuations, interest/exchange rates, inaccurate projections, clients who default on payment or internal theft and embezzlement. It can also be as simple as poor budgeting, bad financial decision making, and mismanagement of debt.
Reputational risk has to do with how your business is perceived by potential customers and the public. Things that affect organizational reputation include lawsuits, product failures and recalls, political issues, customer incidents, negative reviews, and social media. Positive business reputations take time to build, but they can be lost in a second. If your company reputation takes a hit, it can result in a significant loss of customers, partnerships, sponsorships, and ad revenue. You may also find it difficult to maintain company morale and attract and retain talent.
Getting on the right side of your risk
Even if your business is still in its lean days, you’ll want to think about what factors could negatively affect your finances, operations, and overall success.
If you’ve already outgrown your startup phase, you’ve probably also outgrown your initial risk management assessment and plan. And maybe even your favorite t-shirt. Which means it’s time to take another look at how you’re running your operations and managing your risk.
Identifying and mitigating potential threats isn’t a one-time job. It’s an ongoing endeavor that’s critical to the health and survival of your organization.
Once you’re committed to evaluating your business risks on a consistent basis, you’ll be able to take your risk management plan from “if only…” to “Looking good!”
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