Identifying and Managing Business Risks | Investopedia

Running a business comes with many types of risk. Some of these potential hazards can destroy a business, while others can cause serious damage that is ... TableofContents Expand TableofContents IdentifyingRisks PhysicalRisks LocationRisks HumanRisks TechnologyRisks StrategicRisks MakingaRiskAssessment InsuringAgainstRisks RiskPrevention TheBottomLine Business BusinessEssentials Runningabusinesscomeswithmanytypesofrisk.Someofthesepotentialhazardscandestroyabusiness,whileotherscancauseseriousdamagethatiscostlyandtime-consumingtorepair.Despitetherisksimplicitindoingbusiness,CEOsandriskmanagementofficerscananticipateandprepare,regardlessofthesizeoftheirbusiness. IdentifyingRisks Ifandwhenariskbecomesareality,awell-preparedbusinesscanminimizetheimpactonearnings,losttimeandproductivity,andnegativeimpactoncustomers.Forstartupsandestablishedbusinesses,theabilitytoidentifyrisksisakeypartofstrategicbusinessplanning.Risksareidentifiedthroughanumberofways.Strategiestoidentifytheserisksrelyoncomprehensivelyanalyzingacompany'sspecificbusinessactivities.Mostorganizationsfacepreventable,strategicandexternalthreatsthatcanbemanagedthroughacceptance,transfer,reduction,orelimination. Ariskmanagementconsultantcanhelpabusinessdeterminewhichrisksshouldbecoveredbyinsurance. Belowarethemaintypesofrisksthatcompaniesface: PhysicalRisks Buildingrisksarethemostcommontypeofphysicalrisk.Thinkfiresorexplosions.Tomanagebuildingrisk,andtherisktoemployees,itisimportantthatorganizationsdothefollowing: Makesureallemployeesknowtheexactstreetaddressofthebuildingtogivetoa911operatorincaseofemergency.Makesureallemployeesknowthelocationofallexits.Installfirealarmsandsmokedetectors.Installasprinklersystemtoprovideadditionalprotectiontothephysicalplant,equipment,documentsand,ofcourse,personnel.Informallemployeesthatintheeventofemergencytheirpersonalsafetytakespriorityovereverythingelse.Employeesshouldbeinstructedtoleavethebuildingandabandonallwork-associateddocuments,equipmentand/orproducts. 1:40 BusinessRisk Hazardousmaterialriskispresentwherespillsoraccidentsarepossible.Theriskfromhazardousmaterialscaninclude: AcidGasToxicfumesToxicdustorfilingsPoisonousliquidsorwaste Firedepartmenthazardousmaterialunitsarepreparedtohandlethesetypesofdisasters.Peoplewhoworkwiththesematerials,however,shouldbeproperlyequippedandtrainedtohandlethemsafely. Organizationsshouldcreateaplantohandletheimmediateeffectsoftheserisks.Governmentagenciesandlocalfiredepartmentsprovideinformationtopreventtheseaccidents.Suchagenciescanalsoprovideadviceonhowtocontrolthemandminimizetheirdamageiftheyoccur. KeyTakeaways Someriskshavethepotentialtodestroyabusinessoratleastcauseseriousdamagethatcanbecostlytorepair.Organizationsshouldidentifywhichrisksposeathreattotheiroperations.Potentialthreatsincludelocationhazardssuchasfiresandstormdamage,alcoholanddrugabuseamongpersonnel,technologyriskssuchaspoweroutages,andstrategicriskssuchasinvestmentinresearchanddevelopment.Ariskmanagementconsultantcanrecommendastrategyincludingstafftraining,safetychecks,equipmentandspacemaintenance,andnecessaryinsurancepolicies. LocationRisks Amongthelocationhazardsfacingabusinessarenearbyfires,stormdamage,floods,hurricanesortornados,earthquakes,andothernaturaldisasters.Employeesshouldbefamiliarwiththestreetsleadinginandoutoftheneighborhoodonallsidesoftheplaceofbusiness.Individualsshouldkeepsufficientfuelintheirvehiclestodriveoutofandawayfromthearea.Liabilityorpropertyandcasualtyinsuranceareoftenusedtotransferthefinancialburdenoflocation riskstoathird-partyora businessinsurancecompany. HumanRisks Alcoholanddrugabusearemajorriskstopersonnelintheworkforce.Employeessufferingfromalcoholordrugabuseshouldbeurgedtoseektreatment,counseling,andrehabilitationifnecessary.Someinsurancepoliciesmayprovidepartialcoverageforthecostoftreatment. Protectionagainstembezzlement,theftandfraudmaybedifficult,butthesearecommoncrimesintheworkplace.Asystemofdouble-signaturerequirementsforchecks,invoices,andpayablesverificationcanhelppreventembezzlementandfraud.Stringentaccountingproceduresmaydiscoverembezzlementorfraud.Athoroughbackgroundcheckbeforehiringpersonnelcanuncoverpreviousoffensesinanapplicant'spast.Whilethismaynotbegroundsforrefusingtohireanapplicant,itwouldhelpHRtoavoidplacinganewhireinacriticalpositionwheretheemployeeisopentotemptation. Illnessorinjury amongtheworkforceisapotentialproblem.Topreventlossofproductivity,assignandtrainbackuppersonneltohandletheworkofcriticalemployeeswhentheyareabsentduetoahealth-relatedconcern. TechnologyRisks Apoweroutageisperhapsthemostcommontechnologyrisk.Auxiliarygas-drivenpowergeneratorsareareliableback-upsystemtoprovideelectricityforlightingandotherfunctions.Manufacturingplantsuseseverallargeauxiliarygeneratorstokeepafactoryoperationaluntilutilitypowerisrestored. Computersmaybekeptupandrunningwithhigh-performanceback-upbatteries.Powersurgesmayoccurduringalightningstorm(orrandomly), soorganizationsshouldfurnishcriticalbusinesssystemswithsurge-protectiondevicestoavoidlossofdocumentsanddestructionofequipment.Establishofflineandonlinedataback-upsystemstoprotectcriticaldocuments. Althoughtelephoneandcommunicationsfailurearerelativelyuncommon,riskmanagersmayconsiderprovidingemergency-usecompanycellphonestopersonnelwhoseuseofthephoneorinternetiscriticaltotheirbusiness. StrategicRisks Strategy risksarenotaltogetherundesirable.Financialinstitutionssuchasbanksorcreditunionstakeonstrategyriskwhenlendingtoconsumers,whilepharmaceuticalcompaniesareexposedtostrategyriskthrough researchanddevelopment foranewdrug.Eachofthesestrategy-relatedrisksisinherentinanorganization'sbusinessobjectives.Whenstructuredefficiently,theacceptanceofstrategyriskscancreatehighlyprofitableoperations. Companiesexposedtosubstantialstrategyriskcanmitigatethepotentialfornegativeconsequencesbycreatingandmaintaininginfrastructuresthatsupporthigh-riskprojects.Asystemestablishedtocontrolthefinancialhardshipthatoccurswhenariskyventurefailsoftenincludesdiversificationofcurrentprojects,healthycashflow,ortheabilitytofinancenewprojectsinanaffordableway,andacomprehensiveprocesstoreviewandanalyzepotentialventuresbasedonfuturereturnoninvestment. MakingaRiskAssessment Aftertheriskshavebeenidentified,theymustbeprioritizedinaccordancewithanassessmentoftheirprobability. Establishaprobabilityscaleforthepurposesofriskassessment. Forexample,risksmay: BeverylikelytooccurHavesomechanceofoccurringHaveasmallchanceofoccurringHaveverylittlechanceofoccurring Otherrisksmustbeprioritizedandmanagedinaccordancewiththeirlikelihoodofoccurring.Actuarialtables—statisticalanalysisoftheprobabilityofanyriskoccurringandthepotentialfinancialdamageensuingfromtheoccurrenceofthoserisks—maybeaccessedonlineandcanprovideguidanceinprioritizingrisk. InsuringAgainstRisks Insuranceisaprinciplesafeguardinmanagingrisk,andmanyrisksareinsurable.Fireinsuranceisanecessityforanybusinessthatoccupiesaphysicalspace,whetherownedoutrightorrented,andshouldbeatoppriority.Productliabilityinsurance,asanobviousexample,isnotnecessaryforaservicebusiness. Somerisksareaninarguablyhighpriority,forexample,theriskoffraudorembezzlementwhereemployeeshandlemoneyorperformaccountingdutiesinaccountspayableandreceivable.Specializedinsurancecompanieswillunderwriteacashbondtoprovidefinancialcoverageintheeventofembezzlement,theftorfraud. Wheninsuringagainstpotentialrisks,neverassumeabest-casescenario.Evenifemployeeshaveworkedforyearswithnoproblemsandtheirservicehasbeenexemplary,insuranceagainstemployeeerrormaybeanecessity.Theextentofinsurancecoverageagainstinjurywilldependonthenatureofyourbusiness.Aheavymanufacturingplantwill,ofcourse,requiremoreextensivecoverageforemployees.Productliabilityinsuranceisalsoanecessityinthiscontext. Ifabusinessreliesheavilyoncomputerizeddata—customerlistsandaccountingdata,forexample—exteriorbackupandinsurancecoverageisnecessary.Finally,hiringariskmanagementconsultantmaybeaprudentstepinthepreventionandmanagementofrisks. RiskPrevention Thebestriskinsuranceisprevention.Preventingthemanyrisksfromoccurringinyourbusinessisbestachievedthroughemployeetraining,backgroundchecks,safetychecks,equipmentmaintenanceandmaintenanceofthephysicalpremises.Asingle,accountablestaffmemberwithmanagerialauthorityshouldbeappointedtohandleriskmanagementresponsibilities.Ariskmanagementcommitteemayalsobeformedwithmembersassignedspecifictasks witharequirementtoreporttotheriskmanager. Theriskmanager,inconjunctionwithacommittee,shouldformulateplansforemergencysituationssuchas: FireExplosionHazardousmaterialsaccidentsortheoccurrenceofotheremergencies Employeesmustknowwhattodoandwheretoexitthebuildingorofficespaceinanemergency.Aplanforthesafetyinspectionofthephysicalpremisesandequipmentshouldbedevelopedandimplementedregularlyincludingthetrainingandeducationofpersonnelwhennecessary.Aperiodic,stringentreviewofallpotentialrisksshouldbeconducted.Anyproblemsshouldbeimmediatelyaddressed.Insurancecoverageshouldalsobeperiodicallyreviewed andupgradedordowngradedasneeded. Preventionisthebestinsuranceagainstrisk.Employeetraining,backgroundchecks,safetychecks,equipmentmaintenance,andmaintenanceofphysicalpremisesareallcrucialriskmanagementstrategiesforanybusiness. TheBottomLine Whilebusinessrisksaboundandtheirconsequencescanbedestructive,therearewaysandmeanstoensureagainstthem,topreventthem,andtominimizetheirdamage,ifandwhentheyoccur.Finally,hiringariskmanagementconsultantmaybeaworthwhilestepinthepreventionandmanagementofrisks. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedArticles SmallBusiness Top7WaystoManageBusinessRisks Sectors&Industries TheImportanceofHealthCareRiskManagement HomeOwnership TheHiddenCostsofOwningaHome Landlord Top6TipsforTurningYourHomeIntoaRentalProperty RealEstateInvesting WhatAretheChallengesinRealEstateDevelopment? SmallBusiness NewYear’sPlanningforBusinessOwners PartnerLinks RelatedTerms BusinessContinuityPlanning(BCP) Businesscontinuityplanning(BCP)establishesprotocolsandcreatespreventionandrecoverysystemsincaseofacyber-attackornaturaldisaster. more Contingency Acontingencyisapotentialnegativeeventthatmayoccurinthefuture,suchasanaturaldisaster,fraudulentactivityoraterroristattack. more LaborMarketFlexibility Labormarketflexibilityallowscompaniestomakedecisionsabouttheirlaborforceinresponsetomarketchangesandtohelpboostproduction. more CommercialLinesInsuranceDefinition Commerciallinesinsurancehelpskeeptheeconomyrunningsmoothlybyprotectingbusinessesfrompotentiallossestheycouldn’taffordtocover. more Rent-an-EmployeeDefinition Arent-an-employeeisabusinessstrategythatinvolvesacompanyhiringfakeemployees,usuallyactors,tocreateanillusionthatit'sbusyandthriving. more InformationManagementTechnology(IMT):TheInsandOuts Informationmanagementtechnology(IMT)isthedistribution,organization,andcontrolofthetechnologyanddataofabusiness. more