Are you wondering what’s the best way to protect your business in these ever-changing times? If so we have the answer for you, risk management.
Using risk management within your company to identify what could go wrong so you’re prepared later can help save your business money and resources. To learn more about risk management and how to implement it within your company keep reading below.
What Is Risk Management?
No matter what size your business is you’ve probably run into issues with insurance, claims, and even general risks. For example, your office building can be taken down by a fire, or someone could slip and fall on the job. These situations can have a big impact on your business if you don’t take the proper steps to protect yourself and your work culture.
The word risk is well known in the English language. Every day people take risks in many aspects of their lives and sometimes we take risks without even realizing it.
When it comes to risk management it’s the process of carrying out and making decisions that will lower the effects of risk on your company or organization. These risks can be objective like claim costs and insurance premiums. They can also be subjective like a decrease in productivity or even damage to the organization’s reputation.
When you focus your attention on the risk you can commit to the necessary resources you need to lower and control risk. You can help to protect your business from uncertain things that may happen and even increase the chances of having a successful business. Overall, risk management helps with workplace safety and workplace security.
When a risk exits it’s usually due to the opportunity for a loss or even profit. When we talk about losses we are referring to risks as exposures to losses. This can be a fire or even defective products.
Know the Risk Equation
If you’re unsure about what your risk could be you should be aware of the equation. The extent of risk can easily be expressed by using the following formula:
- Risk= Probability x Severity
The probability you’ll include in this formula is the likelihood of an event happening. Severity is the extent and cost of the loss.
Risk can easily be broken into two different categories. The first being pure risk.
Pure risk is when the possible outcomes are a loss or no loss. This includes things such as an office being robbed and having an employee that’s involved in a car accident.
The second type is a speculative risk. This is when the outcome is either a status quo, profit, or loss. This includes things like investing in the stock market and decisions within the business like creating new products and even opening new locations.
Why Should I Manage Risk?
Managing risk within your business is a great idea. When you start managing risk you will help your company have the resources to grow and flourish.
Managing risk can help you save resources. It can help you to see if you have too many people on the payroll, what your income is, to keep an eye on your properties, and even if the time your company is putting in is worth it.
What Is the Process?
When it comes to putting risk management into action for your organization you should be aware that it is a process. This process is vital to any organization and doesn’t have to be difficult to implement.
Good risk management doesn’t have intensive resources and shouldn’t be hard for insurance brokers to provide to your company. All you will need is a bit of structure, some formalization, and a strong and educated understanding of your business or organization.
With this said we should point out that risk management will require some time and money investments. The amount of time and money you invest in risk management doesn’t need to be a lot for it to be effective.
In truth, risk management is more effective when it’s put into action and maintained gradually over time. The key to having successful risk management is to have a basic understanding of the 5 step process.
Step 1: Find and Identify Risks
In this step, you should look at your company as a whole and ask yourself what could go wrong at any given point in time. When executing this step think about the 4 main risk categories.
The first category is hazard risks. Hazard risks include things such a fire or injuries your workers may obtain on the job.
The second category is operational risks. Operational risks are things such as high turnover rates within the business or even supplier failure.
Financial risks are the third category. Financial risk is something such as an economic recession.
The fourth and final risk category is strategic risks. Strategic risks are things such as your brand’s reputation and can even cover electronics like computers.
Identifying what risks your company could have is a very important part of the risk management process. Usually, businesses can identify these risks by looking at past experience and their internal history. You can even consult other industry professionals if your company isn’t too old.
Another way you can help to identify risks is by doing external research. Look and see what similar organizations in your niche have run into and see if that risk applies to your company.
Step 2: Measure Severity and Frequency
After you have identified your risks you should think about the likelihood of the risk happening. What would be the impact on your business if you encounter the risks you identified?
To make this step easier companies usually use something known as a heat map. This map helps to measure risks on a scale basis. These maps use visual tools to help identify which risks are frequent and even which ones will be severe to your company.
You can even have your map show you what risks will require the most loss in resources and even how many resources you will need to use to get the company back to running properly.
This map will help you to see which risks have a lower impact and are unlikely to happen. On the other hand, it will also help you to see which risks will happen more often and have a big impact on your company.
Knowing which risks will happen often and how severe they are will help you to invest the right amount of time and money into the areas that need it the most. This will even help your team to prioritize resources in case the risk was to happen sooner than later.
Step 3: Look At Other Solutions
Now that you know what risks will have the most impact on your company it’s time to think about how to treat the risk. You will also want to think about how much these treatments will cost and how much time they will need to be implemented.
Your treatments for risks should have a balance of being affordable and effective. Keep in mind that as an organization you have the power to transfer, avoid, accept, and control any risk that may come your way.
When you accept the risk you know that some risks are apart of doing business. This also means that the benefits of this risk are greater than the risks.
Avoiding risk is not involving yourself with an activity that could potentially cause a risk. To control a risk you will need to reduce the chances of the risk happening. This is also known as mitigation or reducing the impact of the risk if it does arise.
Transferring risk is when you give the responsibility for any negative outcomes of the risk to another party. An example of this is when a company or business buys insurance.
Step 4: Decide What’s Best and Do It
After you have listed all reasonable solutions you will need to select one. You should choose a solution that is most likely to achieve your desired outcome if the risk were to happen.
After selecting the best solution you will need to gather resources together. This could be things as more people on the team or even funding. After this, you will need to obtain the buy-in which is necessary for this step.
Higher-ups should approve the plan. After approval, it falls on the team members to stay informed and be trained in certain areas if necessary.
A formal process should be set up to make the solution active. This process should be logical and consistent across the entire company. An effective process will also encourage every employee involved every step of the way.
Step 5: Look At the Results
It’s good to remember that risk management is a process. It’s not a project that can be thrown together, completed, and then forgot about. Your business, the environment in which your business and workers are in, and the risks that your company can encounter are always changing.
With this said, you should be doing all 5 steps frequently and revising where needed. After going through steps 1 to 4 take time to evaluate your process. Ask yourself if it was effective and where it could use some improvements.
Don’t let this step be discouraging. Sometimes you may need to start from scratch to find the best solution for the risk if this process didn’t work out.
If you gradually work with your business on risk management you will develop risk culture in no time. This culture will be adaptable whenever it needs to be changed and more resilient. It will even lead to making better-informed decisions when looking at the bigger picture of your business’ operating environment.
Tips for Risk Management
Now that you’re ready to work on your risk management protocol for your business you should keep some tips in mind to make the process run smoothly. Below you will find our top tips.
Keep Old Insurance Policies Locked Away
Keeping things such as older insurance policies will be valuable to you in the future. You should keep it to consult what’s covered in your insurance plan and use it for reference when needed.
Don’t Over or Under Insure
You should insure for the true value of the risk management process. This means that you shouldn’t insure for less or more than what you need because it can cost you money in the long run.
Loss Control Is Worth It In the Long Run
You should be spending money and time on loss control. You need to spend money on the risks that will have the largest impact on your company. Another tip to keep in mind is that you should invest in your budget.
Work on Building Relationships
Make sure you’re cooperating with your adjuster, broker, and insurer. This will help to build stronger relationships as long as your transparent with them.
Protect Your Company’s Image
One of the biggest underestimated risks is image risks. Your company’s brand and the image are very important so it should be protected.
When thinking about your risks consider how each one will affect your image. From there come up with solutions that will help with the risk but also protect your image as well.
Now You Know All About Risk Management
You are now well educated in risk management. From knowing what it is and how it can help your business to know the 5 step process you should be a risk management pro. For more insurance tips and information be sure to check out the rest of our website.