Nov 15, 2019
s a business owner, do you want to stay ahead of the game when it comes to risk management? Or are you already in hot water and looking for a way out? Just like in most human endeavours, there are also risks obtainable in business. Although these risks vary from one business to the other and are in line with the peculiarities of each, there are still some general and common risks which every business should guard against. Continue ready to find out more.
The term ‘Business risks’ implies an uncertainty in profits and a danger of loss arising from situations, circumstances and unforeseen events which could ultimately cause a business to fail. These factors can show their ugly head at different stages of the life cycle of a business, ranging but not limited to product or service development, manufacturing, marketing and growth management.
The concern of all proprietors is to manage their business, by minimising or avoiding inherent and peculiar risks through the formation, adoption and application of certain strategies. Eight of these strategies will be explored.
Planning is usually the first step in almost every enterprise. In business risk management, planning is very essential. It involves the setting up of a road map and the documentation of time, capital and other resources to be employed in the business and their expected returns on investment. It also involves the knowledge of competing variables and factors that largely influence the business and the awareness of key performance indices to appraise the business periodically.
Planning also involves the prioritising of possible risks in order of their likelihood of occurrence and their effect on the business (if and when they occur). It is very instructive however not to entirely place a high priority in putting checks on the events with a higher chance of occurrence, over those with a very little chance. But rather, place more focus on which event is most likely to impact the business when they occur. A balance on the two extremes is very appropriate.
Record Keeping and Protection
Record keeping and protection are very essential in the mitigation of risks in business. Although with the advancement of electronics and the advantages they have over paper record keeping, most businesses tend to adopt the former. However, whichever method is adopted and depending on the type of business, it is pertinent that records of previous transactions, employees, customers, assets and liabilities are well managed (documented and protected) so that access to them can be swift.
In addition, records should be backed up so that duplicates can be readily obtained in case of loss or destruction of the primary records as a result of deliberate or inadvertent human activities. Whereas photocopies and good filing systems are essential for the paper record keeping, external storage devices including cloud storage are key for the electronic storage. Good record keeping can save time and money, especially during bill payment. It also gives room for referrals to previous activities and makes for future planning and projections.
Lack of accounting or in many cases improper accounting has been identified severally as a major reason for businesses collapsing. To minimise risk in business, with its attendant negative effects, it is essential to keep track of monies and goods received and expected, along with payments made and those yet to be made and their particulars. Knowledge of these at each point in time or near real time is necessary to maintain balance and stability in business primarily in the quest to achieve competing goals like expansion in infrastructure and manpower, acquisition of more equipment, capital assets and the introduction of new products or services. Also, proper accounting and its analysis make for a good evaluation of the health of the business, its progress rate and allows for forecasting.
Irrespective of one’s planning strategy, there are unforeseen circumstances that may arise in business that cannot be totally prevented. These situations include but are not limited to fire outbreaks, theft, death, flood, wind storm, and other natural disasters. These usually unpredictable situations mostly interrupt businesses, increase operational cost, cause loss of income and sometimes impromptu need of business relocation and in some cases closure.
Insurance protects a business from the severe effects of these unforeseen situations as it allows the insurance company to bear some or all of the loss depending on the insurance policy reached. It is necessary for a business to understand the risks it is exposed to and insure against them. Although insurance with its lofty benefits comes with its cost which often deters people from embarking on it, the sustenance it brings in time of need is certainly worth all spent in its acquisition.
It is imperative to maintain high standards of goods and services, integrity and good reputation in the business. This is necessary to keep customers from going to competitors as a result of the absence of these essential business expectations. Quality control is a very much needed practice to overcome this situation. It involves the review of products or services with the aim of making necessary adjustments in the event of defects, before marketing them to customers. It reduces risks of product failure and warranty claims and ensures business stability and growth. Depending on the business scale, it may involve the setting up of quality assurance, control and customer care units to receive complaints from customers, analyze such complaints, correct errors when found, improve on products with the aim of maintaining standards, reputation and overall customer satisfaction.
Diversify Income and Limit Loan
In the event of business expansion, it is usually advisable to have income coming from more than one source. It is a proactive way to keep an individual and his business out of bankruptcy. In case a particular business is having hard times or eventually fails, the other source(s) of income could be used to support the business and sustain the individual. If it becomes vital to take loans to start up or support a business, it is advisable to keep it as low as possible and to the tune that a business can accommodate its repayment plan. Limiting loan intakes and diversifying income will help reduce financial risks.
Avoid High-Risk Customers and Business Associates
Customers with poor credit will usually expose a business to risk. Implementing a policy of no credit or granting credit facility calculated to the tune that won’t expose the business to risk in case of bad debt, is an important risk management strategy. Also, business associates should be individuals and establishments with good business ethical conduct, who obey government policies, maintain industry standards and avoiding sharp practices. This will prevent issues that may arise from litigation and penalties which may also affect an individual’s business when such associates run foul of the law.
Setup a Risk Management Team
Setting up a risk management team is an important business risk mitigation strategy as the team is saddled with the responsibility of identifying, assessing and developing strategies to manage risk. The team also develops strategies to minimise the impact of risks on the business when they inadvertently occur. This team could be internal or external depending on the peculiarities of the business. Periodic audits and evaluation of the team, their strategies and the entire business operations would also be very needful.
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