We all understand risk is part of life. Avoiding all risk would result in no achievement, no progress and no reward. But what is risk, exactly? The Institute for Risk Management defines risk as “The combination of the probability of an event and its consequence.” So there are two parts to risk: the odds that it will happen (probability) and the results (consequences) if it does. And the consequence can be either positive or negative. So, you want to enhance the positive and limit the negative outcomes, as much as possible. This is where risk management comes in. Risk management is the systematic process of understanding, evaluating and addressing these risks to maximize the chances your objectives are achieved and ensuring your business is sustainable.
It is important to remember that it is not all about bad things. Risk management also exploits the opportunities uncertainty brings, allowing organizations to be aware of new possibilities. Essentially, effective risk management requires an informed understanding of relevant risks, an assessment of their relative priority and a rigorous approach to monitoring and controlling them.
The Risk Management process involves five basic steps to help you identify your key risks and find the best solutions that fit your business:
- Identify Potential Risks anything and everything that could possibly happen. No one can anticipate everything, but a good brainstorming whiteboard session around “what if” will go a long way in identifying what could possibly go wrong. For example “What if my supplier goes out of business?” or “What if my old warehouse burns down?” The more eyes and brainstorming – the better. And stay alert for new opportunities, too.
- Examine alternatives or strategies you might employ if any of these things were to happen. Be sure to prioritize so you are working on big stuff first. “I will find at least one or maybe two back up suppliers.” “I will look for an alternative warehouse that has a fire suppression system and insure my personal property.”
- Select the strategy that best fits with your profit and operational goals, but most importantly, SOLVES THE PROBLEM. You will want to weigh the options based on cost effectiveness and timeliness. But remember, risk management is all about what the risk is to your operation versus the cost to your operation.
- Implement your solutions. Implementation should start with documentation – even if it is just a picture of your whiteboard! If there is a strategy that involves your staff, they should be made aware of the process and trained. You may even need to do more elaboration on a strategy like, “What should my employees do if we are robbed.” Get the plan documented, make a copy, train your staff and by all means keep your work in a safe place that you can revisit, at the very least on an annual basis.
- Monitor your outcomes. This is critical! Once you implemented, did you find out additional information that informed the process or potentially changed the solution? If you placed insurance coverage – is the amount of insurance still appropriate? If you had a previous loss history, have you implemented a strategy to reduce or eliminate the potential of that loss reoccurring? Doing this along the way will make your annual update imminently easier!
Risk management does require some investment of time and money, but it does not need to be substantial to be effective. In fact it will be more likely to be employed and maintained if it is implemented gradually over time. The key is to have a basic understanding of the process and to move towards its implementation.
A risk management plan – basic or complex – can save you unnecessary expense and inconvenience. Freedom Insurance is here to help.