4 Ways to Manage Business Risk

business risk

As you’re well aware, risk is a normal aspect of life and business. However, it’s also clear that unnecessary risk can lead businesses down a path of destruction – a path that ultimately ends in pain, failure, and regret. So how you can you properly manage risk so that it benefits your business, rather than hurts it?

What is Risk?

It depends on who you speak with and in what context you’re operating, but risk is all about uncertainty. In terms of finance, “Risk implies future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain from an investment.”

In a business sense, risk is all about choices and outcomes. Some is good and too much can be bad. How you balance risk is ultimately what determines your long-term success and viability.

How to Properly Managing Risk

“Risk. It’s at the core of just about every decision you make at your facility: how you interpret it; how you measure it; how you manage it; and most importantly, how you mitigate it,” PinnacleART explains. “Effective risk management helps you prioritize how you spend time, money, and materials, and is inarguably one of the most crucial elements behind improving safety and preventing asset failure.”

Whether you run a manufacturing plant, an IT business, or a small boutique, your risk management strategy will have a significant impact on your organization’s success and longevity. Here are some tips you may find helpful:

  1. Prioritize Potentials Risks

Risks are everywhere around you. The only way to excel with risk management is to prioritize. One method involves breaking risks down into these categories: Very Likely to Occur, Some Chance of Occurrence, Small Chance of Occurrence, and Not Likely to Occur.

“Be careful with this prioritization method, however, because a risk that is Very Likely to Occur won’t always have top priority,” risk management expert Dan Moskowitz advises. “You must also factor in the financial damage potential. If one risk is Very Likely to Occur but would have a minimal financial impact, then it’s not as important as a risk that has a Small Chance of Occurrence but comes with a significant financial impact.”

  1. Offset Risks With Insurance

Some risks can be managed fairly easily – particularly those that have “some,” “small,” or “not likely” chance of occurring. Evaluate the risks your business faces in these areas and consider obtaining insurance policies to offset the financial ramifications. This might include life insurance, disability insurance, professional insurance, or something else that’s specific to your industry.

  1. Use Contractual Indemnification Clauses (As Needed)

There are certain risks that you have direct control over. These tend to be internal processes and factors that are influenced by you and your team. But when you interact with other businesses and partners, you don’t always have control. In these cases, contractual indemnification clauses can provide an additional layer of protection.

“Let’s say you distribute a piece of software to your customers. It turns out the provider didn’t have the rights to the software, and you get sued,” says Jonathan Ezor, law professor at Touro Law Center. “That’s where indemnification comes in. But it’s only as good as the finances of the other party. If you’re worried the finances on the other side of the contract aren’t sufficient for the possible risk, you can contractually require the other company to maintain insurance.”

It’s little areas like this where thinking ahead can save you serious trouble and disaster on the backend. If you lack experience, an industry-specific consultant can help you foresee issues like this before they occur.

  1. Hire the Right People

Insurance and contractual clauses will only do you so much good. At the end of the day, you need smart people in your corner who can anticipate, prepare for, and respond to risk in shrewd ways that positively impact and preserve your bottom line. Intelligent hiring practices are worth their weight in gold.

Take Smart Risks

It may seem like risk is a bad thing, but it isn’t. If you become totally risk-averse, you’ll limit your opportunities for growth and success. But at the same time, you can’t embrace too much risk, or you’ll fall flat on your face. The goal should be to take smart risks – risks that promise a high reward if they’re successful, but minimal fallout if they fail.