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Why manage risk?

Business Risk Management

Why Manage Risk?

Why Manage Risk?What does a meteorite hitting your business and forgetting to bring your laptop’s power cord on a business trip have in common?

Both are risks that could have a severe negative impact on your business.
Risk refers to anything that could go wrong or cause injury or damage. It is also as inescapable in business as it is in life. Learning to manage risk helps owners and managers build better and stronger businesses.
But why manage risk? Why not eliminate it?

The goal of eliminating all dangers from your business sets you up to focus on a level of perfection that isn’t obtainable. The simple truth is that not all risk can, or should, be eliminated. It is also possible that your efforts to eliminate all potential dangers could introduce new risks or result in expenses that are out of proportion to the potential loss or the likelihood that the risk will occur.

In the meteorite example, you could build a protective dome around your business to prevent the meteorite from striking it. However, this would be a very expensive solution to a problem that is very unlikely to occur.

Other more mundane risks might be more likely to happen, but the cost of eliminating them isn’t worth the potential loss. For instance, many stores and websites offer extended warranties on electronic goods. If you are purchasing a relatively inexpensive, unlikely to break item such as a computer keyboard, you might decide to skip the extended warranty and accept that you might have to replace it in that warranty period.

Intelligent Risk Management Decisions

While some risks do not merit elimination, that doesn’t mean you shouldn’t do anything about them. This is where risk management becomes a valuable practice. Risk management is about educating yourself regarding the dangers that you face and making informed choices regarding how you will handle them.
Your business will face a wide variety of risks, from potentially catastrophic disasters, like that meteorite, to relatively mundane day to day problems, like forgetting your charger or running low on office supplies. Identifying these risks will help you understand your business and start thinking about ways to manage them.

As you begin managing risk remember: the goal in risk management is to look at what can reasonably be done to avoid, prevent, mitigate, or prepare for a risk occurrence. What is reasonable will depend on a variety of circumstances surrounding the risk you are facing. Questions to ask include:

  • How likely is the risk to occur?
  • Are there warning signs when the risk is more likely to occur?
  • How devastating could this risk be to your business?
  • What are the legal or industry standards regarding this risk?
  • What can be done to prevent, lessen or mitigate the risk?

Answers to these, and other, questions can help you understand your situation. Effective risk management can also help you find solutions to recurring problems and prevent hidden inefficiencies and costs from creeping into the business.

Building a meteorite defense shield is excessive, but a comprehensive business insurance policy that includes acts-of-god plus reliable off-site backups of important information will help you mitigate losses in the event of a natural disaster.

When you are examining other risks a more direct approach may be appropriate. You can purchase a second charger for your travel bag to avoid losing power at a critical moment. At the same time, you can also be willing to skip the warranty and replace the keyboard if it breaks down in three years.

As you work to manage your risks, remember that business risk management is largely a matter of identification, preparation, and taking a proactive approach to issues that are important before they become urgent. Managing risk saves time, money, and effort. These savings can ultimately allow you to concentrate on things that are more important to you and your business.

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