Thomas M. Bragg on Business Risk Management

Risk management is arguably one of the most under-utilized business tools available to owners and managers today. It involves planning for potentially bad events before they happen. Risk management is a technique for predicting what unplanned events might occur and what the impact of those events might be. It’s also a technique for pre-planning how those events can be avoided or how their impact can be minimized. Almost every business does a limited amount of risk management – usually in the form of insurance – but very few businesses actively manage their risks.

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So what kind of risks am I talking about? They run the gamut. The insurance I mentioned usually deals with financial risks associated with natural disasters, fire, injury or death, accidents, etc., but there are many, many more risks facing your company.

.Basically every assumption a business makes is a potential risk. Businesses make a lot of assumptions every day, so there are a lot of risks. Here are some examples:

• A highly publicized customer service failure
• A lower priced competitor entering the market place
• A large increase in raw material costs
• Lower than expected response rate to a key marketing campaign
• An economic downturn

Starting to get the idea? But risk management isn’t all about the bad things that can happen. It also addresses the good things that can happen to your business – a.k.a. opportunities. If you have an assumption there are two possibilities if your assumption doesn’t pan out. The possibility of the actual result being worse than the assumed value is the risk. The possibility of the actual result being better is the opportunity. Make sense? Some example opportunities are:

• A highly publicized customer service success
• A lower priced competitor goes out of business
• A large decrease in raw material costs
• Higher than expected response rate to a key marketing campaign
• An economic recovery

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The concept of risk management is pretty simple – only 3 basic steps:

1. Identify the risks,
2. Evaluate the risks
3. Plan for how to avoid the risks or how to deal with them if they occur.

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Risk management can be applied to any type of planning you might do – business planning, strategic planning, financial planning, market planning, product planning, etc. The technique is the same for all of them, only the risks and planned responses change.

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You can make the risk management process as simple or as complex as you want. It can be a spreadsheet with automatic formulas, fancy formatting, etc. or it can be a spiral notebook with pencil entries. The mechanics of how you do risk management aren’t as important as the thought that you put into it. Dr. Jeff Cornwall recently wrote a very eloquent piece about the importance of business planning that nicely sums up how the thinking provides benefit.

Our actual path in our business will likely look very different than our plan. But the plan got us thinking. It made us think about all the details. It helped us understand how all of the parts of a business fit together to make a whole venture. It helps prepare us for our journey and makes us better prepared to adjust to all of the surprises that we will face almost every day we’re in business.

Risk management is the specific method that helps better prepare us for those surprises that are sure to happen…

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This blog is dedicated to business risk management. In the future I will write about how the technique can be applied in different ways and the detailed step-by-step instructions on how to do it. Every now and then I’ll write about examples of risk management in current events to show how it’s being used (or should have been used) in real life.

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I’m glad you have joined me. I’m looking forward to our discussions on how risk management can contribute to your business’ success.  Do you see the possibilities? Stay tuned…