Risk management in the business environment
All business decisions involve potential risks. In order to predict and monitor these risks, business owners often rely on their prior experience and intuition. However, this is not always a successful approach. To protect against business risks, you should spend time to gain a deeper understanding of risk management processes, what they entail and how you can implement them in your business environment to avoid future risks.
Risk management processes in the workplace also give entrepreneurs greater confidence when it comes to making business decisions.
What is risk management?
Risk management is a process aimed at monitoring the potential risks of business decisions. When you apply this process in the workplace, you reduce these risks, which have a negative impact on your business. In addition, this process will help you explore opportunities that can have a positive impact on your business.
The benefits of risk management
When you make key business decisions, it is important to consider potential risks and how to deal with them as they occur. If you succeed in managing risks, you will minimize the negative effects of unexpected events on your business.
In addition, proper risk management provides many advantages, including:
- Improving your relationship with customers, suppliers, employees and the community in general, by understanding and managing their expectations correctly.
- Enhancing employee confidence as a result of working in a safe environment, securing health insurance and financial compensation, and implementing policies and conditions that protect their rights.
- Maintaining your workflows, during natural or economic disasters, through an emergency management plan.
- Reducing the costs of liabilities and insurance; as a result of a lower damage risk.
- Taking sufficient time to properly manage risk also helps you plan for other, less obvious risks.
Ahmed, who owns a fast-food restaurant, is well aware of the risks that his staff may face in terms of hot cooking surfaces and sharp utensils in the kitchen. So, he trained them well on how to safely use the devices and knives to reduce the risk of injury. However, Ahmed did not anticipate a decline in sales after a similar restaurant opened nearby.
Thus, we conclude that Ahmed has succeeded in reducing the injury risk to his employees but failed to plan for less obvious risks relating to his business.
The risks you should manage
In accordance with the law, you are responsible for managing certain risks in the work environment, including:
- Accidents and injuries: You should provide a safe working environment through the enforcement of health and safety laws in the workplace.
- Injury to employees: The work environment should provide workers’ compensation insurance.
- Preventing damage to the environment by meeting environmental laws in your country.
Risk management steps
The ideal risk management process should involve the following steps:
First: Identify and evaluate risks
Before you take any action to reduce risks to your business, you first need to identify these risks and determine which ones require rapid intervention.
This risk assessment phase involves three steps:
First: Identify the risks. In this step, you need to note all the risks that may face your business, for example:
- Review recent events and risks.
- Potential future changes to your work environment, such as changes in economic trends as well as social and community issues that may affect your business.
To identify potential risks, you can also:
- Search for risk records, incident reports, customer feedback, recorded complaints and opinion polls.
- Review audit reports such as financial reports or workplace safety reports.
- Check the strengths, weaknesses, threats, and opportunities for your business.
- Discuss issues related to your business with employees, customers, suppliers and consultants.
Analysis: After identifying potential risks, you need to assess the risk level to determine which risks require immediate intervention. To do this, you first need to consider:
- The damage that the risk can cause (for example, the risk of having fewer customers means lower sales for your business).
- The likelihood of this risk (for example, you can consider the similarity between your business and the actions of your competitors to determine the degree of customer loyalty.)
After that, you should work out a system to estimate damages and classify the probability of a risk occurrence. For example:
- You can rank damages from 1 to 4 (1 for minor damages, 4 for serious damage)
- Risk occurrence probability from 1 to 4 (1 is unlikely, 4 is highly probable) To determine the risk level, you can use this mathematical formula: Risk level = Damage × Probability of occurrence
Based on the above example, the lowest level of risk you can obtain is 1 × 1 and the highest level of risk is 4 × 4, so you can use these risk levels to categorize your business risks from least urgent to most urgent.
Assessment: You should compare risk levels for different events according to criteria in your risk management plan. This process helps you decide whether or not to accept this risk. You also need to know if your risk management plan allows you to accept these risks, so you can specify the type of action to take.
When should you accept risk?
Some business owners choose to accept risk, rather than spend money to avoid it. Here are some of the reasons why you might accept potential risks:
- If treatment costs are much higher than potential risk outcomes.
- If the risk degree is very low.
- If the risk-taking benefits outweigh the potential damages.
Second: Risk review and management
In this step, you develop the necessary plans to deal with unacceptable risks to your business. You need to review and address these risks so that you can:
- Reduce or eliminate the likelihood of adverse events and their impact.
- Increase the likelihood of positive events and their impact. And most importantly, to address the most urgent risks first.
Here are some strategies you can use to address unacceptable risks for your business:
- Risk sharing
It means that you can transfer or share part of the business risk as follows:
- Purchase appropriate insurance.
- Enter into a partnership.
- Outsource some tasks (such as getting an IT consultant to manage technology).
- Reduce risk
You can reduce risk by:
- Reducing the likelihood of negative events or increase the positive opportunities for your business.
For example, you can hire an IT solution provider to back up your business data regularly and store it in more than one location, reducing the likelihood of negative events such as data loss for your customers, while at the same time increasing the likelihood of securing more customers as a result of adopting additional security measures.
- Avoiding risks
If you are unable to reduce potential hazards to acceptable levels, you can decide to avoid activities that triggers this risk. But this should be your last option. Avoiding some activities may mean missing out on the positive opportunities that will boost your business in the future.
How can you apply the risk management process in the work environment?
In order to initiate this step, you need to learn about risk management practices and how you can apply them in your business. You should hold discussions with other people in your work environment (including employees and customers) to discover the best ways to manage these risks.
Most importantly, you need to prepare your risk management plan so it is properly structured and includes all necessary items and sections.