Risks are an inevitable part of business. However, sound risk management can help to protect your business and reduce the impact of events beyond your control. It may also lower the cost of your insurance premiums, create a safer environment for your workers and reduce business downtime. These tips will help you to develop an effective risk management process.
Make sure you meet your legal obligations
Under various laws, you’re required to manage or reduce the following risks:
- workplace accidents and injuries
- customers being treated unfairly
- damage to the environment.
You’re also legally required to have Workers’ Compensation insurance to reduce the risk that your employees will suffer financial hardship due to a work-related accident or illness.
Consider other areas that could pose a risk
You shouldn’t just consider taking precautions against risks that you’re legally obligated to. Other areas that you may want to consider include:
- Compliance – complying with relevant laws, regulations, standards and codes of practice.
- Finance – risks associated with transactions, cash flow, credit, foreign exchange and changes in interest rate.
- Operations and administration – having effective procedures in place.
- External factors – for example, damaging weather or unfavourable economic conditions.
- Reputation – the damaging effects of things like defective products and recalls, data breaches, negative social media and poor work practices.
- Cybercrime – the potential for criminals to damage both your finances and your reputation through malware, phishing, ransomware and more.
Our business risk checklist can also provide further detail on what risks to be aware of.
Prioritise your risks
All risks need to be managed but some need to be dealt with more urgently than others.
One way of establishing priorities is by giving both the potential impact of each risk on your list and the likelihood that it will occur a score of 1 to 4, then multiplying these two figures together.
For example, a risk that is very likely to happen (4) and have a devastating impact (4) would have the maximum score of 16 (4 x 4). A risk that is unlikely to happen (1) and would have little effect if it did (1) would have the minimum score of 2.
Decide on a strategy for each risk
Once you’ve assessed your risks you can decide how to manage each one. In general, you have a choice of four strategies.
Avoid the risk completely
This may be possible where you have complete control over a situation or scenario. For example, if only one person is capable of completing a particular task, you can remove the risk associated with that by training someone else to take over when they’re away or move on.
Mitigate the risk
A plan to help you deal with a risk event should it happen, can go a long way in reducing the impact of the event. Depending on your business and your priorities, this could include:
- training your employees in cyber security
- building a small business cash reserve
- checking references before offering credit
- regularly checking for safety hazards
- setting up a disaster recovery plan.
Transfer some or all the risk
An example of transferring risk to a third party is when you take out an insurance policy. It’s a good idea to talk to an expert about the type and amount of cover you need.
Accept the risk
Sometimes the best or only option is to accept the risk. For example, if the cost of insuring against a particular risk outweighs the cost of that risk event occurring, then you might decide to not take out insurance. You may also decide to accept a risk which is very unlikely to occur. Every individual and business will have a different appetite for risk. It’s helpful when making decisions about how you’ll manage risk to talk to experts. Make sure you’re fully aware of what the outcome of a risk event would be if you chose to do nothing to protect against it.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.