Risk is an inevitable aspect of any business operation and can be challenging to manage. However, effective risk management is crucial to ensure that you are getting enough rewards for the risks that you do take. In fact, risk can be seen as a strategic opportunity as well as a competitive advantage.
You see, strategy and risk go hand in hand, and understanding your weaknesses and threats can help you turn them into strengths and opportunities. For example, if you are aware of the risks associated with a particular market or product, you can adjust your strategy to minimise those risks and gain a foothold in that market.
It’s also essential to identify the big swing factors in your business that could significantly affect how you run things. Understanding these factors and their potential impact on the business is essential for making informed decisions. Identify the top three or five swing factors that you should really be thinking about and ask yourself, “Where do we stand on that? Are we okay with it? And if it played out badly, would we be okay with that?” Assumptions play a crucial role in this. It is essential to identify the key assumptions you are making and test them against different scenarios. By doing this, you can understand the top risks that you should really be thinking about.
Risk management is a never-ending exercise.
For small businesses, it may be overwhelming to manage the thousands of risks that exist. Instead, focus on the big, obvious ones and what has been changing in the world since you set up your business. For example, cyber risk, privacy concerns, and other issues that may not be in the news daily but are still important to consider. By understanding these risks, you can make changes in your business, such as tweaking product features or taking out insurance. Additionally, there may be some risks that you can turn into an advantage by adjusting your product range or eliminating certain elements.
It’s often scary to consider the many risks that exist, but it is not worth worrying if you cannot identify the top risks in a couple of hours. Once you have identified the top risks, consider your options and choose the most efficient and effective way to mitigate those risks. This does not mean that taking risks is a bad thing. It means that you need to be rewarded for the risks you take and choose the risks that have the best risk-reward outcome for your business.
After identifying the important factors, the next step is to monitor, track, and report on them. It may seem overwhelming, but staying on top of these metrics is crucial before they become bigger issues. However, if we’re already gathering data on these factors, then we don’t need to build additional reporting. It’s essential to have a litmus test to determine if it’s worth investing effort in reporting on these metrics.
Monitoring is like driving a car. It’s okay to hit the rumble strips on the side of the road, but we shouldn’t ignore them. We must pay attention to warning signs and indicators to catch potential issues before they become crises. Risk management involves anticipating possible outcomes and considering how they would affect us. It’s essential to play out scenarios and assess how we would react to government regulations, human behaviour, or supplier relationship changes.
In hindsight, we may realize that we should have taken different actions if we had known about certain risks. Exercising foresight and considering different scenarios to plan and put optionality in place is crucial. Ultimately, monitoring and risk management are about staying ahead of the curve and avoiding crises before they happen.
The final thought I’d like to leave you with is taking risks is good – it’s how we make money! If you can’t pinpoint any risks inherent in your business, it’s unlikely that you have a business at all. It’s essential to acknowledge and comprehend these risks, while also managing them in the most cost-effective manner possible. Embracing risk is beneficial, and incorporating risk management into your SWOT analysis is a key component of strategic business planning, enhancing your strategy and competitive advantage.
At Active Directions, we help many Small to Medium enterprises uncover and understand the key risks their business may face. Our objective and wholistic approach enables the businesses we work with to confidently and successfully deliver on their strategic objectives and navigate through change as required. Reach out today for a confidential conversation.
About the Author
Clinton Lollback has 30 years of experience in the banking and finance sector, with a focus on audit, risk management, and internal and external audit. He has worked for several companies, including PWC, Westpac, JP Morgan, and Macquarie, where he designed and implemented operational risk management frameworks for global organisations.
