Published on 10/05/2018 by Any Business.Com.Au

Business risks and management strategies

It's a good idea to understand the different types of risks your business may face so you can recognize them, plan ahead and manage them.

Risks can be:

• opportunity-based – risk from choosing one option over other options

• uncertainty-based – risk from uncertain or unknown events such as natural disasters or loss of suppliers

• hazard-based – risk from dangerous materials or actions

Opportunity-based risks

This type of risk comes from taking one opportunity over others. By deciding to commit your resources to one opportunity, you risk:

• missing a better opportunity

• getting unexpected results

Opportunity-based risks for a business include moving a business to a different location, buying a new property, or selling a new product or service.

Uncertainty-based risks

This type of risk comes from uncertainty around unknown or unexpected events. It's hard to predict these events and the damage they can cause. It's also hard to control the damage once these events occur.

Examples of uncertainty-based risks include:

• damage by fire, flood or other natural disasters

• unexpected financial loss due to an economic downturn, or bankruptcy of other businesses that owe you money

• loss of important suppliers or customers

To reduce the impact of uncertain events on your business, you can do things like:

• develop an emergency management plan to reduce the damage to your business in an emergency

• keep a supplier database to help you manage your stock and equipment

• seek and use regular feedback from your customers and other people you deal with in your business

Hazard-based risks

These types of risks come from dangerous situations in the workplace.

Some common examples include:

• physical hazards caused by high noise levels, extreme weather or other environmental factors

• equipment related hazards caused by faulty equipment or poor processes when using equipment such as machinery

• chemical hazards caused by improper storage or use of flammable, poisonous, toxic or carcinogenic chemicals

• biological hazards caused by viruses, bacteria, fungi or pests

• ergonomic hazards caused by poor workplace design, layout or equipment use

• psychological hazards caused by bullying and harassment, discrimination, heavy workload or mismatch of employee skills with job duties.

Risks that you must manage

You're required by law to manage some risks. For example, you must manage or reduce the risk of:

• accidents and injury by making your workplace safe under workplace health and safety (WHS) laws

• customer complaints by treating customers fairly under Australian Consumer Law

• injury or harm to employees by having workers' compensation insurance

• damaging the environment by meeting the environmental laws that apply to you

• Learn more about the insurances you may need in our insurance and risk management section.

Risk management strategies

Making a strategy for risk management can involve more than just deciding whether to accept the risk or not.

If your business is part of a bigger supply chain that involves retailers, distributors or primary producers, you can spread the risk across a number of areas.

By spending time and resources on your risk management strategy, you'll provide a safe workplace and reduce the chances of negative impacts on your business.

Consider these steps when forming your risk management strategy:

Identify the risks

Working out the risks to your business could be as easy as thinking about what could go wrong, and how and why it could happen. You might also need to do some research into:

• past events and risks

• possible future changes to your business environment, such as changes in economic trends (find out how to conduct market research and industry research)

• social and community issues that could affect your business.

To identify risks, you can also:

• look at hazard logs, incident reports, customer feedback and complaints, and survey reports

• review audit reports such as financial audit reports or workplace safety reports

• do a strength, weaknesses, opportunities and threats (SWOT) check for your business (download our marketing plan template for instructions on how to do this)

• discuss business issues with your staff, customers, suppliers and advisers.

Analyse the risks

After identifying the risks to your business, it's time to work out which ones are urgent. To analyse the risks related to an event (such as a competitor moving into the same street), you should first look at:

• the damage that the risk would cause (for example, the risk of fewer customers means lower sales for your business)

• the likelihood of the risk happening (for example, think about how similar the competitor's business is to yours, and how loyal your customers are)

Work out a rating system for damage and likelihood. For example, you could have:

• ratings of 1 to 4 for damage (1 for slight damage, and 4 for severe damage)

• ratings of 1 to 4 for likelihood (1 for not likely, and 4 for extremely likely)

Evaluate the risk

To evaluate a risk, you should compare the level of risk for various events against your risk criteria (find out how to set your risk criteria when you design a risk management plan). You should also check if your existing risk management methods are enough to accept the risk.

When to accept risk?

Sometimes businesses choose to accept risks and not spend any resources on avoiding them. You might decide to accept a level of risk for the following reasons:

• The cost of treatment is much higher than the potential results of the risk

• The risk level works out to be very low

• The benefits of taking the risk greatly outweighs the possible damage

AnyBusiness.com.au

Curtis is a leading expert in the business-for-sale industry, serving as a senior content creator at anybusiness.com.au.

With a career spanning over fifteen years, Curtis has accumulated extensive knowledge in the domain of business sales, acquisitions, and valuations. His deep understanding of market dynamics and his ability to translate complex industry jargon into accessible insights make him a trusted resource for entrepreneurs and business owners looking to buy or sell businesses.

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