RISK STRATEGY GUIDE

12 Sep 2012

Risk is one of the most overlooked areas for new business. It is clear to most entrepreneurs that starting any new business involves risk, and risk is one of the reasons many of us are entrepreneurs. There is a certain thrill in taking the gamble and making a business work. Many entrepreneurs, however, do not consider instituting measures to manage the inherent risks of doing business.

Part of the difficulty is that each business will have different types of risks so it is difficult to generalise. Insurance covers the ones that are most common and there is even specialised insurance for particular risks that are inherent to your particular field of endeavour. However, insurance is only part of the package you as a business must consider. Contingency planning for other potential hazards is just as important as insuring against losses.

You prepare for marketplace risk through your business plan. In the same way you need to prepare for the risks of illness, disability, damages, losses, injuries, and even disasters. A good risk management system not only has adequate insurance coverage to compensate you for losses, which might occur, but it also includes a plan to manage unexpected events as they occur.

Setting up a Risk Management System

Your overall risk management system needs to have contingency plans in place for whatever “surprises” might occur and employees need to be trained in how to handle these “surprises.” What is meant by “surprises”? It could be someone entering your retail store with a gun and asking for the all the money in the till. It could be the stream running past the farm overflowing and flooding your tourist accommodation. It could be you having a heart attack unexpectedly. It could be your best supplier or customer closing its doors.

Following these steps can assess risk:

a Read through your business plan with an outsider’s eye, this will give you a good overview of where some of the problems might arise.

b Think of yourself as a banker deciding to fund the business, what would you worry about happening that could cause this business to default on its loan?

c Carry out a brainstorming session in which you look at “what if so and so happens”. If possible, include others who have very different perspectives in this brainstorming session. The questions that should be considered are; what would happen if the risk occurred? How likely it is that the risk is to occur? This brain storming can take place over a long period of time, as you will not be able to think of everything in 20 minutes.

From your brainstorming session you should have developed a list of all the possible risks you need to manage. Using these lists, decide what action or coverage is needed for your business to handle each possibility that you outlined. Consider alternatives. For instance, a fire alarm system may greatly reduce fire insurance or may negate the need for it at all. Once you have this list you are ready to look at what you need to put in place to manage your risk.

Monitoring risk

For many of the areas of risk that have been identified during the brainstorming exercise will need monitoring systems. If visitor numbers are an area of risk for a tourism business how will the number of visitors by monitored. By following a few steps monitoring systems can be established:

a Assess which risks need monitoring from the list created through the brainstorming.

b Identify what will be the most sensible way of monitoring these risks, consider the system to be used, the cost of that system, who will be responsible for the monitoring, and will the monitoring system give you information that will identify the relevant risk early enough.

c Write this monitoring strategy down in a useful way and insure that the relevant people are capable and aware of their responsibilities.

Risk Management Tools

When a risk occurs a strategy is needed so that your employees are aware of what procedure to carry out. A good example of this is when the fire alarm is sounded if all the employees are not aware of the procedure they should follow, it could result in that employees death or a fireman risking his life to rescue a person believed to be trapped in the building when in fact they are standing the other side of the building as they are not aware of the fire assembly point.

By following a few points for each of the risk areas identified in the brain-storming exercise and those where monitoring strategies have been designed for, the occurrence of a risk should be easily contained:

a • Identify what areas of the risk can be influenced.

b • Identify which risks can be insured against. The logical protection for some risks is insurance.

c • Write a mitigation strategy for each risk. This could be as simple as to purchase a petrol generator for power cuts and to ensure that the employees are able and knowledgeable to use the generator. Other risks may need a greater level of detail and a more comprehensive risk strategy such as if visitor numbers are falling then a full marketing plan needs to be implemented.

d • Write this strategy down and insure that all staff are fully aware of what to do for each risk.

Conclusion

The next step that needs to be taken is to combine the three steps in to one risk strategy. This should cover each risk in turn, as follows:

a • What the risk is?

b • What affect the risk would have on the business?

c • How likely the risk is to occur?

d • How the risk will be monitored?

e • Risk strategy for the risk?

f • Who will be responsible for that risk?