Perspectives: Managing Risk

March 2012

Warren Buffet once said that risk comes from not knowing what you are doing. In its truest sense, risk is the potential exposure to loss, though Buffet's words are certainly true for business owners. 

Any business venture will bring with it a set of risks, but the key to successfully managing them is being both aware of what the risks are and understand that it's normal for those risks to exist. With that awareness, business can be organised with strategies in place to prevent, mitigate, respond and adapt when the need arises. 

Whether you're someone with a stomach of steel and can withstand the pressure or fear that change can bring or a Nervous Nelly with a distinct preference for flight at the first hint of danger, it is how you respond to risk that determines its impact on you, your business and your customers. So what are the risks you should be aware of?

Operational risk management 
Operational functions such as financial position, business diversity and market relevance are the most fundamental risks for any business. These are the part of the engine room that makes your business hum and enable it to respond effectively when unexpected change occurs or adapt when a risk presents the need to plan for future change. For example:

Financial risks
Do you have sufficient cash in your business for current and future commitments, and do you have visibility of your current and future financial position? Without sufficient capital, your ability to adapt is much harder and slower, which could prove costly

Supply chain management
Are you managing your supply chain effectively including inventory, supplier credit and service fulfilment? If these aren't managed properly then your ability to deliver your service or product can be hampered by not having the appropriate resources or people in place. 

Product risk
What is the value proposition of your product in the eyes of the consumer? If your product doesn't meet the expectations of the buyer, or if you don't manage their complaints properly through warranty, quality control or good customer service, then you risk damage to your business reputation and future sales.

Systems failure
Are you able to respond effectively if your systems fail or your supplier systems disrupt your business? Building redundancy into your technology and having a disaster recovery plan is essential to getting everything back to normal in dealing with your customers.

Business interruption
How will your business respond if there are interruptions that are unforseen or catastrophic to your business? How quickly can you get back online and provide critical business operations yet alone getting back to normal?  Having the right resources and structures in place are essential to keeping the business operating while it gets back on its feet. 

For example, losing your place of business might create significant disruption, however your ability to function and meet the needs of your customer while getting back to normal business relies on having strategies in place to keep income coming in. Insurance, while providing funds to rebuild the physical business, isn't going to get your business back up and running on its own.

Failure in any one of these areas can often cripple the business because the other areas are interdependent and aren't able to function effectively. Planning and the ability to respond to unexpected issues is fundamental to keeping both staff and customers on side when things do go wrong. 

Insurance is compensation, not risk prevention
Insurance is only part of the strategy to mitigate risk, as it provides financial resources to support recovery, but it isn't the only approach to managing risk. Insurance by nature is compensation and is not a risk prevention tool. Insurance will not provide any protection against poor management or failure to address risks that arise from these parts of your business. You will be hard-pressed to find an insurance policy that will protect against negligence. 

Tackling risk in your business
We've highlighted some of the key risks business owners face, and in upcoming newsletters will delve further in to other risk management considerations such as the bigger picture risks of IP protection, adapting to changing conditions, business diversity and market relevance.

We'll also look at: 
  • how to approach risk by understanding your appetite for it
  • methods to identify, evaluate and treat risk
  • understanding your financial position 
  • processes, procedures and strategies
The key to tackling risk is having options for when things go wrong and building sufficient safety nets to minimise the impact. Having effective strategies in place will help your business take the best course of action.

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Last updated March 2012. This article is provided for information purposes only and should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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