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Why every business must have risk management

July 8, 2016

There are risks associated with running any kind of business. Unfortunately, many business owners in Australia get caught out when a risk becomes reality and they do not have adequate protection. In some cases, this can even lead to bankruptcy.

Today, we’re talking about the importance of risk management, and how to establish an effective risk management procedure in your business.

What is risk management?


Risk management is the process of identifying prospective risks in a business, and then developing a strategy or plan for managing these risks, if they were to eventuate.

Why does risk management matter?

Knowing what could go wrong in your business, and what action to take if it does, protects your business significantly from loss of profits, damage to reputation and other negative repercussions.

It also allows you to identify what kind of insurances you should be taking out in order to achieve maximum value for your insurance spend. By way of example, a construction company may require different types of insurances to an office-based corporate company.

On top of this, some forms of construction may require more specific kinds of insurances. As such, it’s not just about seeking protection, but seeking the right kind of protection. So that if something does go wrong, you are effectively covered.

Unfortunately, many businesses in Australia do not have an effective risk management plan, nor do they have the right kind of cover. In some cases, these businesses are forced to declare bankruptcy if a risk is realised.

Risk management strategies

There are many resources online you can draw on to develop a Risk Management Strategy. However, we always recommend speaking with a qualified professional, to assist with coming up with a viable plan that aligns with your business.

Ideally, your risk management plan should follow the steps below:

  1. Assess your business

  • What are your key business activities?
  • What are your core services?
  • Who are your employees or contractors?
  • How could a disaster, for example, a power failure, impact them?

 

  1. Identify potential risks

  • Think broadly about potential risks in your business.
  • Yes, fire and storm damage are obvious starters, but what else could be a problem?
  • When are these risks likely to occur in your business?
  • Where are they likely to occur and why?
  • Are the risks external or internal?
  • Who may be involved or impacted by the risk, if it were to happen?
  • When identifying potential risks, ask ‘what if’ questions.
  • What if we lost Internet access?
  • What if the power went out for a day?
  • What if our core supplier went bankrupt?
  • What if our most effective employee quit?
  • Consider brainstorming all of these potential ideas. Think laterally!

 

  1. What’s the impact of each risk?

  • Now you have a list of potential risks relating to your business, consider the impact of each risk, if it were to eventuate.
  • Use a table or some kind of organisational tool to keep your ideas clear.
  • Below is an example:
Risk Likelihood Consequence Level of concern
Storm damage Likely Business shut down. Financial losses over $20,000 per week. 4

 

  1. How can each risk be avoided or reduced?

  • This is probably the most important element of your risk management process – working out how to reduce or avoid the risks completely.
  • For each risk, brainstorm how it could be avoided, transferred or reduced.
  • Consider whether you have insurance that adequately covers you for each risk.

Head here for a more detailed guide on developing a risk management strategy for your business.

Conclusion

Once you have developed a risk management strategy, it’s important to revise it regularly. Risks change rapidly in today’s highly digitised world, so we recommend incorporating risk management brainstorming sessions into your regular working schedule.

Our insurance brokers can assist you with developing a risk management plan, and we can identify specific insurances that will protect you against potential risks. Contact us to get started.

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