Many businesses implement risk management plans to assist with managing and minimising risks in everyday business operations. A risk management plan recognises these risks and provides a strategy to deal with them should they occur.
It is essential to be proactive, develop a plan, and identify the potential risks of the business, as it will help reduce the challenges should a potential risk occur.
To help ensure you’re always ready for what’s next, we’ve outlined key steps to developing a risk management plan.
Step 1 – Identify the risks
The first step in implementing procedures to help minimise risk is to identify any risks the business may face, whether internal or external.
In order to identify risks, ask ‘what if?’ questions, for example, what if something were to happen in the economy – how would this affect your business? What if prices for certain materials increased globally – how would that impact your business? By asking ‘what if?’ questions, it will help you identify any potential risks so that strategies can be put in place to help minimise these risks should they occur.
Below, we have included a few examples of different risks a business could encounter –
- Risks posed by customers
- If there is a specific client base that the business relies on to generate a substantial portion of their income. This can potentially cause cash flow issues for the company if one of the clients stops yielding revenue.
- To mitigate this risk, a business can lock in the major clients through long-term service contracts, assisting the smaller clients in helping them grow and seek new profitable customers.
- Risks posed by financial transactions
- The liquidity of the business pairs with how well the business can operate. If a business has poor cash flow, it runs the risk of being unable to repay its debts, with the directors potentially liable.
- To manage the liquidity of a business and to assist with minimising financial risk, the business can implement cash flow reviews, which will be monitored weekly, monthly or quarterly to assess the cash in and out of the business. This also helps identify areas where a business may need to reduce costs and provides focus areas.
- Risks posed by information technology
- If a business relies heavily on information technology and cannot operate without it, there is a greater risk if an event occurs and the technology cannot be used. If a system were to fail during an important period, it has the potential to affect the revenue of a business. For example, if a retail store cannot use EFTPOS due to technical or internet connection issues, there is the potential they may lose sales.
- To mitigate technology risks, a business should ensure that all laptops and desktops have the appropriate security software installed, perform backups daily, protect certain networks and servers a business relies on and provide proper training to all staff.
Step 2 – Analyse and evaluate the risks
Once risks have been identified within a business, a decision needs to be made on the likelihood of the situation occurring and understanding the severity if it does happen.
Firstly, assess the probability of the risk occurring and separate this into three categories: low, medium and high. Once the likelihood has been rated, the seriousness of the impact of those specific risks must also be rated using the categories low, medium and high.
When assessing certain risks, an example is if machinery or plant that was crucial to the business’s operations needed maintenance, think about the monetary value and how much it would cost to repair. Once all potential risks have been assessed, attend to the high risks first and the most expensive.
Step 3 – Managing risks
After analysing the risks, it is crucial to implement strategies to ensure procedures are in place if any events occur. This could include regular cash flow reviews and gaining different perspectives on the best way to handle these risks, whether that be from employees, accountants or financial advisers.
If many employees are involved in the procedures that have been implemented, it is essential that each employee knows their role. This will help reduce human error, as certain threats can be stopped before jeopardising business operations.
Next steps
Once risks have been identified and analysed and procedures have been put in place, they must be reviewed regularly. There is the potential that new risks may occur if the business implements new services or products, the ratings of certain risks may change, and procedures that have been put in place may fail.
For your business to continue to grow and succeed, you must understand the potential internal and external risks and put procedures in place to help mitigate them.
Speak with your local Nexia Advisor today to identify and manage any potential risks your business might face. We can help you establish effective risk management plans and procedures, allowing your business to continue to reach its full potential without interruption.
