There are certain practices you engage in to reduce your physical risk — wear a seatbelt, get check-ups at the doctor, take medication when prescribed, and more. Likewise, your company must engage in risk management practices to reduce the chances of a negative outcome.
Risk management in business can become a deeply complex, time-consuming, and expensive process. It often involves pulling in multiple departments, including accounting, sales, and IT. However, little is as important as reducing unnecessary risk. Here’s a look at risk management financial practices and the steps you need to take to reduce your risk.
Identifying Various Types of Business Risks
“Risk” is, by design, a broad term. As such, you must first understand the various types of business risks. They include:
- Financial: What are the short-term or long-term financial threats to your organization?
- Operational: What challenges may negatively impact your ability to operate? This includes cybersecurity, fraud, employee morale, and more.
- Strategic: Are you aiming for long-term strategic success for your business? Are you monitoring industry trends and preparing your organization to meet customers’ challenges? Are you watching how business-wide trends, such as AI, may impact your organization?
- Compliance: Are you meeting required regulations in certain industry sectors, such as health or cybersecurity?
- Legal: Are you meeting all legal requirements necessary to operate within the confines of the law? This means ensuring you meet customers’ legal expectations and fulfill any contract’s terms.
Quantitative and Qualitative Risk Assessment Methods
Once you have identified the various risk types, you must assess your risk in each area. There are two types of risk assessment methods: quantitative and qualitative.
Quantitative risk assessment uses hard numbers, accounting methodologies, and data to determine the likelihood of a specific event occurring. The same data can be used to reduce your risk in many cases. Examples of quantitative risk assessment include decision-tree analysis or a three-point estimate of certain products.
Qualitative risk assessment is more subjective. Instead of data, it involves using subjective intelligence and conversations with staff or customers to determine the likelihood of an event occurring.
Developing Risk Mitigation Strategies and Contingency Plans
Risk mitigation strategies involve engaging in actions designed to reduce the risk of a catastrophic failure. The specifics of these actions vary from business to business but can involve:
- Bringing in an outside vendor to train your staff in some areas.
- Updating your technology to prevent cyber intrusion.
- Assessing your business’s risks regularly and taking certain actions to ensure you are monitoring those risks.
A critical part of risk management is acknowledging that risk can’t be eliminated, and sometimes, “the worst” may happen. Accounting for these circumstances means developing contingency plans. The goal of these plans should be that you know what to do if a certain risk — like a data breach or lawsuit — occurs. Having these plans ready lets you take the best actions to protect your business’s strategic position. It also ensures you aren’t scrambling at a highly stressful and emotional time.
Insurance as a Risk Transfer Mechanism
Insurance protects your business from a potentially catastrophic loss by ensuring you can become financially compensated if a specific negative event occurs. As part of a trend to reduce risk over the past few years, the business insurance industry has seen significant growth, with an array of new products offered to protect businesses.
Some types of insurance — like types against physical damage or medical benefits — are common and relatively well-known. Other insurance products, like cybersecurity insurance, are newer. As part of your risk management processes, your business must ensure you purchase the correct insurance policies to protect you in the event of a loss. You also have to know under what circumstances these policies will kick in.
Finally, remember, while insurance can transfer risk to your policy, that doesn’t mean you can wipe your hands off risk management. You still have to do everything you can to protect your business and avoid triggering the catastrophic loss that would result in you needing to use your insurance.
Monitoring And Reviewing Risk Management Process
Risk is not static, and your business and external circumstances can change. To that end, your job is to ensure that you constantly monitor and review your risk management strategies to protect your business in the long term. Updating your risk management plans can protect your business and ensure you never get caught flat-footed.
Takeaway
Risk management is deeply complex and requires considerable experience and expertise. Furthermore, it involves ensuring your employees’ safety and data security and protecting your organization from future strategic threats.
Risk management is also not optional, and you need the right people on your team to ensure you are preparing for all types of risk. Contact MRINetwork today to learn more about how we can help you fill in your talent gaps and ensure you are preparing your team to meet the challenges of tomorrow.