You can’t control of everything that is happening in your business or to your business, which means you need to have contingencies and strategies in place should ‘Plan A’ need recalibration – particularly in a turbulent economy.
“Low-probability, high-impact events in the economy are almost impossible to forecast, Black Swan events, are increasingly dominating the market. Because of the Internet and globalisation, the world has become a complex system, made up of a tangled web of relationships and other interdependent factors. Complexity not only increases the incidence of Black Swan events, but also makes financial forecasting near impossible. All we can predict is that companies that ignore Black Swan events will go under,” says HBR.
- It’s an outlier, which is beyond the realm of regular expectations. Experience can’t point to its possibility.
- It will cause an impact that could close down businesses in certain markets or in certain circumstances.
- With hindsight analysis can see how the event happened, making it seem explainable and predictable.
Are you prepared for the uncertainty? Do you have a risk management strategy in place? If not, you need one and here’s why:
What you need to know about financial risk management
Financial risk management is the strategic thinking process that reveals to your team what could go wrong, and what can be done to mitigate financial challenges in cost-effective ways. But, your team needs to know what they’re looking for before they can reduce your risk.
To identify the risks to your business and figure out your strategy to reduce them, you first need to know how to classify the risks. Each risk will have two dimensions to them, namely:
- The likelihood of occurrence.
- Severity of the potential consequences.
You can use these two dimensions to create a four-quadrant framework. This will suggest how you could attempt to mitigate the risks. Once you know how likely and severe a risk is, you can answer the following:Does the benefit of mitigating this risk outweigh the cost?
The quadrants will divide up risks; you’ll have events that you can afford to ignore, low likelihood events and low severity events, and some that you can’t avoid, high likelihood and high severity events. The two middle weight options, high likelihood, low severity and high severity but low likelihood, shouldn’t be underestimated. One factor could change and overnight these risks become black swans.
The different types of risks encountered within a business
These are the different types of risks that will impact your business, but if you’re lucky enough to identify them early, you can develop strategies and increase your business’ chance of success.
1. Financial risks
Financial risks are a high priority for assessment, and are usually the first risk entrepreneurs think about. This is an overarching term for the risks that can impact your business through finances. For example: fluctuating exchange rates, movements in stock prices, cash flow handling and loans at risk of default.
Keep in mind that as your business expands, your financial risks will grow too. Standard Bank Business banking relationship managers can help you organise your finances. They can provide you with a business current account that can give your business access to payment, collection and transaction facilities.
2. Product risks
Determining your product, and explaining it to others so that they’ll invest or purchase it, is the top priority when launching a business. This is a controllable risk, though, because you have a direct impact on the outcome of your business’ product. You can ensure the product addresses a big enough market, the right opportunity within that market at the right time.
3. Risks within your market
You need to know everything there is to know about your target market, including why, how and where they buy related products. This is arguably the most important risk factor you’ll need to assess before you launch your product. You’ll need to be real effort into this research.
“Identifying these routes to market, and whether you can build them effectively, in a timely fashion and within your budget, could easily determine the success of your business,” says Sreekanth Ravi, serial entrepreneur.
If the risk within your market falls in your favour and you enter the market early enough, your business can succeed.
4. Operational risk
Not all risk will come from outside your business. Operational risk comes into play from human error or misjudgement within your venture. You can, however, easily anticipate this type of risk and develop safeguards against internal risks.
Ensure you know where your business is at risk, Standard Bank has created a comprehensive resource for the different types of risks your business will face.
If you’re looking to open up a business bank account, Standard Bank provides a Business Current Account that is simple to manage and allows you to transact in the way that works best for you.
How to identifying and mitigating high risk events
High risk event are the quadrant that have both a high likelihood of occurring and a high severity rating. These risks can sink every business from start-ups to Fortune 500 companies. The survival of your operation will depend solely on your ability to identify and mitigate the high risk events.
Why are high risk events so deadly? The answer is because there are so many of them. One at a time these risks can seem manageable, but all together, they can be a true challenge for any entrepreneur. Consider the following scenario, if you take only 10 company killers and you think you’ve eliminated 90% of the risk in each category. The probability of you surviving all 10 is 35%.
What you need to know is that if your business is reasonably good at managing individual risks then you might have a marginal change of survival. That’s why good enough risk management, isn’t actually good enough. Your risk management strategy must be among the entrepreneur’s core competencies.
How to manage risks appropriately
Here are five steps to help you implement a risk management strategy:
Step 1: Identify the risks
There will be some risks that are common across all types of business, while others will be more specific to your sector, and even to your specific business. You can use a standard risks checklist as a starting place and then incorporate your business’ specific expertise.
Some initial risks are:
- Damage or loss of property
- Operational interruptions, such as no electricity, water, or even an accident such as a chemical spill or fire.
- Legal liability
- Loss of essential personnel
- Injury to workers
Step 2: What is your business’ vulnerability for every risk
Vulnerability can be calculated as a probability, what are the odds that a risk will materialise and how much does your venture stand to lose if it does? In this step you will quantify which risks will directly impact the success of your business and which will pass you by. Once you know which risks, a d how much it will impact your business, you can evaluate how much it will cost you to protect your business against it, and if it’s a worthwhile endeavour at all.
Step 3: Contingency plans
Your contingency plans need to extend beyond buying insurance. You can manage risks by implementing internal systems to keep your employees safe over the speed of production. Install a security system to protect your physical property. Avoid dealing with suspicious seeming customers, and ensure your talented and essential personnel feel they are growing and learning to prevent them from leaving.
Step 4: Insurance
Insurance can help you mitigate risk by protecting your assets and your business, for example:
- General liability insurance covers expenses if there is an injury to a third party.
- Product liability insurance covers you if a defective product causes someone injury or damage.
- Commercial property insurance to protect your physical premises.
For Standard Bank’s insurance offerings you can visit here.
Step 5: Monitor your environment and adapt when needed
You’ll need to update and review your risk management plans regularly. Take a few days every six months to review and update your risk strategy to ensure everything is still current. During your update period remember to keep your insurer in the loop as they may have added insight that can give you an advantage against a specific risk.
Standard Bank can offer you an objective risk assessment to ensure that your business is prepared for anything that could come its way.
- Develop a risk management strategy, which you constantly keep up to date to protect your business from market and internal related risks.
- Insure your business for added protection against manageable and foreseeable risks.
- Know what risks your business is vulnerable to, so that your team is aware of them and can protect and strategise to keep your business safe from them.