This article was originally published on 17/03/2021.
Without a risk management strategy, companies are less prepared to handle unforeseen incidents and weather any accidents. In this article, Capterra outlines the steps of a risk management plan to help reduce the negative impact of potential business threats.
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It can be easy to underestimate the importance of a risk management plan when running a small business, as even the most carefully-planned project can run into trouble. A risk management strategy can help identify the key risks in the workplace that may impact your organisation, such as cybersecurity data breaches, climate change-related risks and general health and safety concerns.
Many different dedicated tools are available to help companies organise, track and mitigate the potential hazards facing their business. In this article, Capterra explains the importance of risk management and the steps to consider when implementing a risk management policy.
What is a risk management plan?
A risk management plan highlights and documents the risks to your business operations and structures before they occur. A strategy should include identifying, analysing, prioritising, treating and monitoring the risks. Thorough risk assessments can help understand these potential threats and mitigation tools can prevent or minimise their impact on your business.
The scope of risk management is very broad. It can include everything from data protection and privacy policies to hiring and firing employees, foreign currency fluctuations, sales opportunities, and more. The exact risks faced by your SME will heavily depend on the specifics of your business, but in general, every business should be aware of the risks it faces and have policies and procedures in place to deal with them.
Why is risk management important?
Risk management is important for a variety of reasons, from providing businesses with a solid understanding of the risks their operations face to dealing with audits and compliance with relevant regulations. The benefits of a risk management plan include:
- Increased awareness of legal requirements
- Improvement in tracking project costs
- Prevention of injuries and falls in the workplace
- Flexibility to adapt to any last-minute challenges
- Efficiency in project planning and management
Businesses that fail to show that they have performed their due diligence before undertaking certain business arrangements can fall foul of the law. Sometimes, the penalty may result in fines, a loss of income or business opportunities.
What is the risk management standard in Australia?
The standard for risk management in Australia is the Australian New Zealand Risk Management Standard (AS/NZS ISO 31000:2009). This defines risk management as “coordinated activities to direct and control an organisation with regard to risk”.
The main purpose of these standards is to provide guidelines for how risk should be analysed, assessed and mitigated regarding a business and its operational activities. These standards cover a wide range of topics within risk management. One such section deals with prioritising business objectives.
Examples of risk management standards
Let’s look at how companies should prioritise business risks. For example, a business wanting to hold an event will need to acquire permits from local officials and acquire sufficient insurance to cover the event. If a business does not do this, it will be denied the permit. Not gaining the permits would be considered a high risk to the business because the event will be called off.
In another example, the same business has a customer that wants extra stall space and will pull out of the event if they do not get it. Risk management involves analysing and categorising these risks by the severity of recourse. This situation would be a much lower risk, as a single customer pulling out will not significantly impact the event.
These examples are simplified, but risk management entails a detailed analysis and evaluation of all potential risks. This also includes a prioritisation based on their criticality to the business's survival and the safety of all personnel involved.
What are the 4 steps of a risk management plan?
The following are essential steps to help SMEs implement a risk management policy:
Step 1: Identify
Risk management first involves creating a uniform structure for identifying and analysing the immediate risks to your business and business operations. It’s highly recommended to use risk management software for this, as it can significantly help with the organisation and centralisation of all business risks. Survey tools can also be used to create pre-established questionnaires or checklists for a project.
Step 2: Analyse
Once a structure has been developed to contain all identified risks, the next step is to perform risk analysis. When in the risk analysis stage, it is important to classify each risk by severity and assign a level of risk for each identified risk. This can range from low or trivial to critical, depending on how much risk it poses to your business. Data analysis software can help project managers to make risk predictions from the patterns found during the analysis stage.
Step 3: Mitigate
Once an understanding of the risks facing your organisation has been established, a series of responses can be generated based on the level of risk. For example, developing a routine procedure is suitable for dealing with issues assigned a low level of risk, whereas something identified as a severe level of risk should have a detailed plan drawn up by senior management for mitigation purposes.
For example, a single desktop computer failing might be considered low risk, with a plan being to simply replace it with a new one. A company that keeps all its critical business documents and files on a single shared server, however, might represent a significant risk, as if the server fails, all business documents are lost. In such a situation, a plan should be developed in order to mitigate that specific risk.
Step 4: Monitor
The final step is to record the risk strategy and ensure all of the planned measures are implemented. You must continue to monitor the strategy results and any new risks that occur to make improvements where necessary. Communication across all teams and departments involved is essential, as you will need to consistently document, analyse and share the progress of your risk management plan. Risk management software can help to monitor the entire framework by providing real-time data insights.
Conclusion
Mistakes, accidents, and incidents outside your control are unavoidable, so when an issue inevitably occurs, it pays to have a plan already in place for dealing with it. Having a sufficiently detailed risk management assessment may sometimes be a requirement for certification, depending on your business and jurisdiction, but even when it is not legally mandated, having a thorough risk management policy is crucial for SMEs. A good risk management plan involves being aware of the current and future potential risks to your business, as well as having tools in place to mitigate the impact of said risks.
The importance of risk management truly becomes apparent when SMEs grow beyond what can be reasonably managed by a single director or core group of business owners. Being aware ahead of time of what is likely to go wrong and how you should react helps to minimise disruptions to your business operations. It also offers the best chance for a business to ameliorate any long-term impacts. Failing to realise or combat business-critical risks can have severe consequences, so the time and effort put into risk management can pay dividends.
