Business Risk Management
- What is Risk Management in Business?
- Why is Risk Management Important?
- Enterprise Risk Management vs. Business Risk Management
- How Do Organizations Manage Risk?
- What are Risks?
- Types of Risks
- Steps to the Risk Management Process
- Examples of Risk Management Strategies
- Advantages and Disadvantages of Risk Management
- Components of an Effective Business Risk Management Plan
- How EntityCheck Helps with Risk Management
Risk is inherent in business; you must prepare for it everywhere. Just opening a business can be risky, but it can be well worth the rewards. Some risks can devastate your company, costing you money and damaging your reputation. Incidents may take time to repair. The key is understanding where risk lies, how to mitigate it, and respond when incidents occur. Avoiding risk and risk management has become a significant part of the organizational culture. Below, you will learn all about risk management in the business environment, how to manage it, and some options for minimizing your company's risk.
What is Risk Management in Business?
Risk management is a strategic approach to identifying, assessing, and mitigating threats to your organization. A risk management plan measures the likelihood of a particular risk impacting and harming the business. The three main factors that cause most risk include:
Regardless of the cause, any risk may result in financial, operational, or reputational damage.
Why is Risk Management Important?
Risk management involves planning for the worst to take quick action and avoid severe damage. The process includes evaluation, prioritization, and plans to address risk when it arises. It affects all areas of the company and helps you make better decisions. If you are well-prepared when risks occur, you can quickly and efficiently minimize the impact on the company. The four ways organizations manage risk are through acceptance, transference, reduction, or elimination. Some of the most significant reasons that risk management is essential are:
Enterprise Risk Management vs. Business Risk Management
Although enterprise risk management and business risk management are both components of risk management, they differ somewhat. Business risk management refers to evaluating possible risks when making any changes to the business operations or processes. It involves making action plans and strategic decision-making regarding what happens in the case of an emergency, such as a facility fire, a cybersecurity attack, or an executive loss.
Enterprise risk management (ERM) is a detailed and structured process that identifies potential risks to the entire company, its operations, reputation, and success, and formulates a response plan. It is a holistic approach to evaluating the company's risk tolerance, risk culture, and preparedness for risk incidents. Enterprise risk management looks at each individual piece to see how any risk affects the company as a whole.
How Do Organizations Manage Risk?
Most organizations use a risk management framework to prevent damage. Some companies use in-house personnel to formulate their business risk management plans, or outsource to analysts or other types of risk management professionals.
A systematic approach includes developing ironclad policies and procedures and rolling out training seminars and safety programs to ensure everyone is on the same page. Insurance companies can help with this and frequently offer assistance through risk management specialists who visit the company to train executives and employees on proper risk management techniques and how to document and evaluate each risk as it arises.
What are Risks?
Risks are anything that could potentially negatively affect your company's ability to achieve its goals. They can be external or internal, leading to financial losses, reputational damage, and operational hindrance. Poor management, employee misconduct, or market fluctuations are a few examples.
Types of Risks
Organizational risks encompass a wide range of potential threats that can negatively affect the company's profits, performance, or ability to operate. Risks generally fall into one of three categories:
Some of the more common categories of types of business risk include:
Facility Risks
Any type of facility, from an office building, warehouse, manufacturing plant, or even a laboratory, poses risks. Some risks include fire, water damage, accidents, or intentional harm. Some of the ways companies plan for facility risks include:
The Occupational Safety and Health Administration (OSHA) dictates workplace safety standards and provides guidelines on how to comply, as well as training and assistance.
Hazard Risks
Many types of businesses deal with hazardous chemicals or toxic substances. These may include acid, gas, toxic fumes, filings, poisonous liquids, or waste. Spills or accidents can occur, requiring the help of HAZMAT professionals or, at the very least, the fire department. The U.S. Department of Transportation (DOT) governs companies that transport hazardous materials.
Location/Environmental Risks
Location and environmental risks include storms (tornadoes, hurricanes, etc.), floods, fire, earthquakes, and other natural disasters. Companies carry insurance to restore buildings and equipment after location-based events, and they may also enact a safety committee to train employees on what to do in the event of specific emergencies.
Human Risks
The workplace is ripe with opportunities for fraud, embezzlement, theft, and other crimes. To reduce these types of risks, employers should perform deep background checks before hiring, implement double-check systems to ensure the validity of transactions, and implement strict policies and procedures regarding handling money or accessing accounts.
Additional risks involve injuries, illness, addictions, and mental health issues. Cross-training individuals to step into vacant slots can help mitigate some of these risks. Some companies offer health benefits like company-paid counseling, rehabilitation, or paid treatments.
Executives can also pose risks through their behavior with things like racism, bias, corruption, sexual harassment, discrimination, and negligent behaviors. Workplace training and violation sanctions can help minimize these risks.
Technology Risks
Most modern businesses rely heavily on technology, and if something happens to it, operations could halt. Some ways to combat this risk are gas generators to keep the lights on and equipment running in case of a power outage or lightning strike. Surge protectors and backups are also highly effective. Many companies use cloud services to access files and critical systems, even if their entire network is down.
Technology is also at risk of cyberattacks and tampering. Implement strict security measures and only allow crucial staff to access critical systems. Take precautionary measures against cyberattacks and store backups off-site.
Operational Risks
Operational risks can threaten the company's ability to provide products or services. They can stem from internal or external sources, including employee behavior, supply chain issues, natural disasters, equipment failure, and sabotage.
Strategic Risks
In business, strategy is everything. A slight change in the business objectives or strategic plan could significantly impact the business's functionality and spell disaster. Some things that cause strategic risk are layoffs, technology changes, new leadership, legal issues, or rising competition. For example, say a manufacturing plant decides to use all new software for its operations. The learning curve, employee resistance, and resulting errors could radically affect the company's ability to produce products, lowering customer satisfaction. In the end, it may be worth it, but it is a considerable risk to take.
Strategic risk is related to a business's objectives. For example, banks and other financial organizations take risks when lending to consumers and businesses, and pharmaceutical companies expose themselves to risk when they develop a new drug. It could also include not responding quickly enough to changes in the marketplace.
Organizations that expose themselves to extreme risk with certain business activities can minimize the losses by diversifying and spreading their business over multiple objectives. So, if one product fails, others may produce enough to cover the losses. Strategic planning can help devise a plan to prepare for this.
Compliance Risks
Many companies are subject to specific laws or regulations governed by bodies like Sarbanes-Oxley or the GDPR in the EU. Non-compliance with these regulations could result in steep fines and other sanctions. They could even shut your company down. Compliance with regulatory requirements is paramount to avoiding risks. These requirements deal with financial, security, labor, civil, or environmental issues.
Reputational Risk
Preserving a company's reputation is crucial; it can directly affect sales. A cyberattack that exposes company and customer information could considerably hurt your business. A company's reputation may be simply a perspective. If a report about your company comes out in the news, even if it is false, it could still hurt your reputation. These risks include personal attacks on company executives and their behavior. Some investors pay particular attention to a business's impact on society, its environmental footprint, and how it handles civil rights. Any situation that causes the public to lose faith in your organization is reputational risk.
Quality Risks
Quality risks apply to companies that make products. If you have a strong reputation for providing high-quality products and suddenly switch suppliers to save money, the quality of the products may drop, and sales could diminish. Employee error, changes in software, and supply chain issues can also add to quality risk.
Financial Risks
Financial risks are any risk to your financial assets and could result in a significant loss of money. They may include pricing changes, currency exchange variation, performing financial transactions, taking on new partners or vendors, landing new clients, or selling assets. If you offer credit to customers, that too is a form of financial risk; you risk never seeing your money. Strategic planning can help determine your risk threshold for how much you could lose and still remain in business.
Security Risks
Companies with physical operation centers or offices must consider security risk. These can include break-ins, theft, security breaches, data leaks, and attacks on personnel. Organizations must employ security guards, locks, and other technologies to keep bad actors out physically and technologically.
Steps to the Risk Management Process
Risk management is a moving target that must be revisited regularly to monitor and improve. The process begins with identification and assessment. Additional steps are required to complete the cycle. The basic risk management process includes the following steps:
- Risk Identification: The first step is to identify all the possible risks you might face. You must examine all aspects of the business to expose vulnerabilities and find where the danger lies. Start by speaking with all executives and management and asking questions about the company's goals, objectives, processes, and where things could fail. Include staff from all levels in this process; create a team of researchers to uncover all potential threats and document them in a summary report.
- Risk Assessment: The next step is to evaluate each risk and its likelihood to occur. Use scoring techniques and assign a numerical value to each risk. Consider 1-5, with one being the most unlikely, and five being the most likely to occur. Then, each risk will be assessed, including its impact on the company. Again, use a numerical scale to rate it with one being a low impact and five being the most catastrophic. These figures will make it easier to determine where to focus your energy. Using these figures, you can create a risk management matrix from which to plan.
- Implement Controls: Develop strategies to mitigate any potential losses from risk or avoid them altogether. Put controls in place to quickly identify if a risk is being realized.
- Resource Allocation: Allocate resources specifically to control, mitigate, and avoid risk and its impact. This may include setting aside budget funds to remediate risk.
- Risk Mitigation: Create a step-by-step plan for mitigating risks before they occur. Get stakeholders on board with the plan. If an audit exposes vulnerabilities in the company network, devise a plan to bolster network security, install special monitoring software, or hire new IT professionals to oversee the system.
- Risk Monitoring: One of the most crucial steps is monitoring risk so you know precisely when the risk has become a real threat. Risk must be monitored constantly, and its likelihood and impact must be regularly reviewed. Companies can assign this task to a dedicated group of risk associates. Any change in the company's risk posture should be immediately addressed.
- Risk Reporting: Throughout the process, each step and uncovered scrap of information should be documented, and regular reports should be submitted to executives and stakeholders for review.
How a company handles risk tells a story. Typically, a business has four main treatment alternatives when dealing with types of risk. They are as follows:
Examples of Risk Management Strategies
Risk management strategies depend heavily on the type of business and its specific business operations, products, or services. Companies often need to deploy multiple strategies to ensure all aspects of the business are covered. Some basic risk management best practices include:
Advantages and Disadvantages of Risk Management
An efficient strategic plan for dealing with risk is crucial for most businesses. However, as with anything, risk management has some advantages and disadvantages. They are as follows:
ADVANTAGES
DISADVANTAGES
Components of an Effective Business Risk Management Plan
Although your plan will vary based on many things, the core components you need to succeed will remain the same. The elements of a successful risk management plan include the following:
How EntityCheck Helps with Risk Management
A successful risk management plan relies on people, policies, practices, and technology. Using top-notch resources can help your risk identification and mitigation programs succeed. EntityCheck is a team of data professionals who gather, collate, and report information on businesses across the U.S. Using our specialized system, you can run business background checks looking for any red flags and filling in the blanks of your risk management profile. We collect our information from government, public, and private sources, and you can access everything you need from one easy-to-use dashboard.
The information you can find in an EntityCheck business background report includes the following:
Enjoy unlimited searches when you try a FREE EntityCheck business background report search and learn more about a company than you thought possible.
- What is Risk Management in Business?
- Why is Risk Management Important?
- Enterprise Risk Management vs. Business Risk Management
- How Do Organizations Manage Risk?
- What are Risks?
- Types of Risks
- Steps to the Risk Management Process
- Examples of Risk Management Strategies
- Advantages and Disadvantages of Risk Management
- Components of an Effective Business Risk Management Plan
- How EntityCheck Helps with Risk Management