This article sets out the major tasks involved with risk management. Managing risk is a three-stage process involving;
Stage One: Risk Identification
The easiest way to identify the major risks a business faces is to firstly, undertake an analysis of the strength, weaknesses, opportunities and threat (SWOT) relevant to your business. This means identifying firstly, the strengths and weaknesses of your business. These are factors in your business that you have control over. Strengths might include a good location, positive cash assets, well-trained staff, and a good reputation. Weaknesses may include poor relationships with suppliers, a narrow range of income sources, poor financial management and a high employer turnover.
Secondly, we identify opportunities and threats facing the business. These are factors that, unlike strengths and weaknesses, you have no control over – you can only respond to them should they occur. Examples of opportunities may include – a buoyant economy, favourable changes in legislation, a large new customer opening nearby, improved international trading conditions. Examples of threats could include rising interest rates, losing a major customer, aggressive competitor activity, increasing cost of supplies and shortages of skilled labour.
Our list of risks to be managed comprises the weaknesses and threats relevant to our business identified in our SWOT analysis. This list may comprise 10-15 items.
Stage Two: Risk Assessment
This stage undertakes an assessment of each risk identified in stage one. The assessment comprises a description of what is likely to happen if the risk is not managed. For example, if a risk is identified as poor cash flow, the description may include the business being unable to obtain supplies, procure employees, or make loan repayments. Any of these may result in the business incurring significant losses, losing valuable customers, and risking insolvency.
Stage Three: Risk Management
This stage involves determining how the business is going to manage each risk and either avoid or minimise the impacts described in Stage Two. There are three basic risk management strategies – risk avoidance; risk minimisation; and risk transference.
The risk management plan is a vital accompaniment to a range of documents including tenders, applications for finance, and business plans.