The Benefits of Risk Management

Risk Management for small business is often overlooked. However, in our experience, the benefits of risk management lie in it being the key tool for delivering strategy and realising objectives. It is usually seen in larger organisations, but in reality, it can be hugely beneficial for small businesses too.

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How can this be?

Risk management in larger organisations can feel very bureaucratic and cumbersome. Most of our experience comes from helping organisations implement practical and agile risk management systems.

The key benefits risk management gives you come from its forward-looking nature. You look forward to potential problems or opportunities and take steps to avoid or realise them. This reduces the time and effort needed and crucially means you are not reacting to challenges and market changes. You’re being proactive.

You might have heard of a SWOT analysis. This is where a team or business looks at its:

• strengths
• weaknesses
• opportunities
• threats

Building on strengths and addressing weaknesses are core business activities, of course, but the key point is they are backward looking. Risk management helps you with the opportunities (potential strengths) and threats (potential weaknesses) that look forward.

The way risk management builds on your SWOT analysis is where its value really starts to show.

Firstly, it asks you what the likelihood of a particular opportunity or threat coming to pass is, if you do nothing, and also what the consequences might be. Typically, these are broken down into:

• financial consequences
• operational consequences
• reputational consequences

For example, what are the financial benefits of realising a particular opportunity? What are the reputational consequences of a particular threat?

There are different ways of scoring risks but all boil down to multiplying likelihood and consequence to give you a raw risk score.

What you have at this point is a list of threats and opportunities ranked in order of seriousness, from highest risk score to lowest.

So what?

This exercise helps you prioritise the areas where you can be proactive.

But you don’t stop there. The second element of value is that you can then decide what (if anything) you can do to address your risks. What can you do to reduce the likelihood and/or consequence of a threat? What can you do to maximise the likelihood and consequence of an opportunity?

Finally, at this point, risk management helps you work out what is worth doing or not. For example, there could be a fantastic opportunity out there. But, the level of investment, either in time or money required, means that it might not provide real value to your business – so perhaps you partner with another business, identify a new source of savings, or decide not to pursue the opportunity at all. Alternatively, you realise that your business’s reputation is at risk because you might find it operationally difficult to fulfil a higher volume of sales – so you decide to invest in your fulfilment service, customer service, or some other area to avoid a potential weakness.

• Find out more about how to mitigate risks here.

Once you have implemented an effective risk management system in your business, these are the kinds of benefits you can expect to see:

Financial:

By looking at financial opportunities and threats you can help to reduce costs and maximise sales or sales opportunities. You can focus on the most profitable activities and customers and avoid low margin resource-intensive activity. Looking forward – because risk management is about being proactive – you can anticipate market changes and trends and act more quickly than your competitors.

In addition, having effective risk management sends a strong, positive signal to potential investors and lenders about the effective governance of your business, making it a more attractive investment.

Operational:

Effective risk management can be a very useful team-building tool. It will bring people across your organisation together to identify and tackle risks. As well as this, risk management can bring tangible operational improvements by helping to strip out unnecessary activity, enhance automation or the use of technology, and make it easier for people to access your services and products.

Reputational:

Tackling reputational risks helps avoid bad press and maximise your profile through engagement and reaching out to new audiences.

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A strong approach to risk management can improve the perception of your brand and contribute to improving value for shareholders. As you are mitigating and managing risk, you can show you are proactively engaging in professional business practices and doing your best for customers. In addition, as effective risk management can improve your operations, you can expect a reputational uplift arising from more satisfied customers.

Getting it Right

Effective risk management requires you to get a number of things right. These include:

• understanding your objectives and priorities
• obtaining timely, high-quality information to inform your thinking
• coming together as a team to identify and evaluate your risks
• identifying actions – and completing them
• reviewing the outcome of those actions
• making this a continuous process, not just a one-off.

Risk management will itself be, and deliver for your business, a process of continuous improvement. Overall, it is a great tool for delivering financial, operational and reputational resilience. Through that, a business that can succeed, grow and out-compete others in the same industry. It can also help you develop your team by having people working together to identify and evaluate threats and opportunities and make them feel more engaged as employees.

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