The Importance of Risk Management in Business

Worker performing risk assessment in the workplace

Life is full of unexpected events – and it is the same for individuals and business organisations. While some are positive (and, indeed, rare), however, others are negative and may occur with enough frequency to warrant your attention as a business owner. 

If an unforeseen event catches your organisation unawares, the impact could be minor, such as a small impact on your overhead costs. In a worst-case scenario, though, it could be catastrophic and have serious ramifications, such as a significant financial burden or even the closure of your business.

The Importance of Risk Management

This is where risk management becomes an essential part of your wider business strategy. By identifying and analysing potential threats to your organisation, such a process mitigates the impact of any negative events or changes that could otherwise be disastrous. To illustrate how, let's take a closer look at the importance of risk analysis and identification in business.

It Helps to Reduce Uncertainty

Uncertainty in any form is bad for business and, by its definition, is difficult to quantify. As Warren Buffett once said, though, "risk comes from not knowing what you are doing." Therefore, understanding the internal and external aspects of your business organisation is an integral part of knowing how to protect it. 

The more knowledge you have about such factors, the lesser the threat posed by uncertainty to your business, which is where a thorough PESTLE analysis can be useful. This is because companies generally exist in a complex ecosystem of constant political, social, economic, and environmental upheaval. Unexpected events arising from any of these spheres can have a damaging impact on your organisation. 

Knowing how to identify when your business is likely to be affected is a core component of risk management. While, of course, you can never truly remove the element of risk in business, many adverse events can indeed be accounted for and mitigated. After all, the maxim that "prevention is better than the cure" is as valid for the health of a business organisation as it is for any human condition.

It is Crucial for Successful Planning

Success in business rarely arrives by chance – more often than not, it is a product of meticulous planning and diligent execution. Unforeseen events can affect the success of your business if you do not have built-in countermeasures in your plans.

If you ignore risk management entirely, everything that you do will carry with it a high chance of failure. For instance, imagine a situation where you fail to identify a workplace safety hazard. If any accident does occur, it could lead to worker injury, reduced productivity, and, likely, a costly lawsuit. 

These events could effectively end your chances of achieving the initial targets as set in your business plan, yet with adequate risk management, it is something that could easily be avoided. When done correctly, risk management identifies threats, minimises their likelihood, and allows you to insure your strategies with suitable precautions and countermeasures. 

It helps Reduce Expenses and Losses

Risks can be divided based on the nature of their impact on your finances: income risk and expense risk. Any events or mishaps that reduce your productivity – or your ability to provide services to your clients – will result in a loss of income.

Developments that raise the cost of your production or other parts of your overhead also come under expense risk, and can present in many forms. For example, a change in legislation might result in increased taxes or compliance expenses; alternatively, additional competition could lead to a rise in marketing expenses. 

If you can anticipate these risks, then you can prepare strategies to deal with them well in advance – or even avoid them altogether. For instance, keeping a portion of your budget aside for such expenses can help you avoid costly interest payments from sudden loans if and when the need arises.

Another positive impact of risk management is on your assets. You can avoid costly expenses that can arise due to damage or destruction of assets if you take precautions. Loss of critical assets can have a huge impact, especially if your business is an SME.

It Helps Improve Your Reputation

Having a proper risk management strategy in place helps to convey a positive message about your business. Internally, it instils confidence among your employees about the capabilities of your leadership; after all, having a safe workplace also helps to boost morale.

When disaster does inevitably strike, your organisation's ability to continue delivering to clients will also have a significant impact on your brand. It demonstrates that your business is robust and reliable, and that you emphasise a professional culture that can continue to get the job done even in the face of setbacks.

Implementing a Risk Management Strategy

Traditionally, risk management has been seen as a prerogative of larger corporations, particularly given their size and financial resources. It's generally true that the larger an organisation is, the bigger its exposure to risk. 

Huge corporations also possess multiple assets and are spread across numerous sectors and geographical locations. Each of these factors has unique risks associated with them, while, by contrast, a smaller organisation will have relatively limited exposure. 

However, this does not mean that, as a small business owner, you should disregard risk management. Even smaller organisations face many risks, whether it be theft, natural disasters, workplace accidents, lawsuits, new government regulations, or simply the rise of better competition. 

While big corporations may be able to weather most of these events, the same cannot be said of startups; for instance, a lengthy and costly lawsuit would make a small dent in the coffers of a corporation. In the case of a small business, though, the outcome of a proportional fine, or a protracted court case, would be drastically different. It could cripple the organisation for some time, or even spell its doom. 

Therefore, the takeaway from this is obvious – you should not ignore risk management just because your organisation is too small to have a dedicated team for it. Business owners should improvise their strategies, with the help of their employees, and be sure that they factor in risk assessments to everything that they do – or face the consequences of failing to prepare.

Why else is risk management so important in business? Let us know your thoughts in the comment section below.